MP-NRLF 


INVESTMENT  PROBLEMS 

PREPARED   TO   COVER  IN  DETAIL  EACH 

CHAPTER  OF  "JORDAN  ON  INVESTMENTS," 

A  TEXT  FOR  INVESTORS  AND  STUDENTS 

OF  FINANCE 

BY 


DAVID  F.  JORDAN 

ASSISTANT  PROFESSOR  OF  FINANCL,      ^W  YORK  UNIVERSITY 

AUTHOR  OF  "JORDAN  ON  INVESTMENTS," 

"BUSINESS  FORECASTING,"  ETC. 


1922 

PRENTICE-HALL,  INC. 
NEW  YORK 


Copyright,  1922,  by 
PREXTICE-HALL,  INC. 

Printed  in  the  United  States  of  America 
All  Rights  Reserved 


PREFACE 

This  book  of  problems  has  been  prepared  to  accompany 
the  author's  text  on  "Investments."  The  chapters  in  the 
problem  book  correspond  with  the  chapters  in  the  text.  Page 
references  in  the  problems  are  also  to  the  text. 

The  problems  have  been  made  as  practical  as  possible. 
In  fact  many  of  them  have  been  put  to  the  author  by  students 
in  his  classes,  especially  in  the  Wall  Street  Division  of  the 
School  of  Commerce  of  New  York  University,  where  the  stu- 
dents are  actively  engaged  in  investment  work. 

For  solution  of  certain  of  the  problems,  reference  is  sug- 
gested to  Dewing's  "Financial  Policy  of  Corporations"; 
Brown's  "Municipal  Bonds";  Huebner's  "The  Stock  Mar- 
ket" ;  Meeker's  "The  Stock  Exchange" ;  and  the  bibliography 
given  in  the  text. 


D.  F.  J. 


NEW  YORK  CITY 
JULY,  1922 


490262 


CONTENTS 


CHAPTER 

I.  ECONOMIC  THEORY  OF  INVESTMENT    . 

II.  FORMS  OF  INVESTMENT  SECURITIES 

III.  TESTS  OF  INVESTMENTS       . 

IV.  UNITED  STATES  GOVERNMENT  BONDS 

V.  STATE  BONDS 

VI.  MUNICIPAL  BONDS  S* 

VII.  CORPORATE  SECURITIES  IN  GENERAL    . 

VIII.  CORPORATION  BONDS  AS  INVESTMENTS 

IX.  STOCK  AS  AN  INVESTMENT 

X.  RAILROAD  SECURITIES  ***  . 

XL  PUBLIC  UTILITY  SECURITIES  ^ 

XII.  INDUSTRIAL  SECURITIES  ^^. 

XIII.  REAL  ESTATE  MORTGAGES 

XIV.  FOREIGN  INVESTMENTS        . 

XV.  FIDUCIARY  INVESTMENTS    . 

XVI.  THE  SMALL  INVESTOR         . 

XVII.  WORK  OF  THE  BOND  HOUSES    . 

XVIII.  LISTING  ON  THE  EXCHANGES    . 

XIX.  MECHANICS  OF  PURCHASE  AND  SALE    . 

XX.  MATHEMATICS  OF  INVESTMENT 

XXI.  GENERAL  INVESTMENT  PRINCIPLES 

XXII.  RELATION  OF  ECONOMIC  CONDITIONS 

XXIII.  RELATION  TO  TAXATION     . 

XXIV.  SAFEGUARDING  OF  INVESTMENTS    . 

XXV.  THE  PROTECTION  OF  INVESTMENTS 

XXVI.  READING  THE  FINANCIAL  PAGE 

XXVII.  THE  TOOLS  OF  INVESTMENT 


PAGE 

6 

10 

24 

30 

34 

38 

48 

52 

62 

66 

74 

80 

88 

90 

96 

102 

106 

112 

114 

118 

124 

128 

132 

138 

140 

146 

150 


CHAPTER  I 
ECONOMIC  THEORY  OF  INVESTMENT 

1.    With  reference  to  the  appended  balance  sheet: 

(a)  What  items  represent  wealth?  property? 

(b)  What    is    the    capital   of   the   company?   the   capital  stock?   the 
capitalization? 

(c)  How  has  the  value  of  the  items  been  determined?    In  what  units 
is  the  value  of  the  items  represented? 

(d)  Wrould  a  commitment  in  the   securities  of  this  company  be  an 
investment  or  a  speculation? 

THE  ASSOCIATED  IRON   COMPANY 
JANUARY  1,  1922 

Assets 

Land  and  buildings   $1,000,000 

Machinery  and  tools   '.  500,000 

Furniture  and  fixtures   30,000 

Securities  owned 400,000 

Cash  on  hand 100,000 

Accounts  receivable  .'. 200,000 

Notes  receivable  50,000 

Inventories    held    500,000 

Patents  and  trade  marks   .  100,000 


Total  assets   $2,880,000 

Liabilities 

Capital  stock   $1,000,000 

Profit  and  loss  surplus 750,000 

Bonds   payable 750,000 

Reserve  accounts   80,000 

Accounts  payable  300,000 


Total  liabilities    $2,880,000 

2.  What  is  the  capital  of  each  of  the  following  companies : 

(a)  United  States  Steel  Corporation. 

(b)  General  Motors  Corporation. 

(c)  Pennsylvania  Railroad  Company. 
id)  Southern  Pacific  Company. 

(e)   Montana  Power  Company. 

3.  (a)  The  Panama  Canal  3  per  cent  bonds  of  the  United  States  Gov- 

ernment, due  in  1961,  could  be  purchased  at  79  per  cent  of  their 
face  value  on  January  1,  1922.  Did  this  discount  exist  because 
of  apprehension  that  the  Government  might  prove  unable  to 
make  payment  in  full  at  maturity? 

(b)  What  is  the  difference  in  the  present  value  of  $1000  receivable 
immediately  and  $1000  receivable  in  1930? 


oblems — Economic  Theory 


(c)  What  is  the  etymology  of  the  word  "interest"  and  what  is  the 
application  of  this  derivation  to  the  relationship  between  the 
value  of  present  goods  and  future  goods? 

4.  (a)   Distinguish  between  interest  and  usury. 

(b)  What  was  the  ecclesiastical  attitude  prior  to  the  nineteenth  cen- 
tury with  regard  to  interest  payments? 

(c)  Is  Aristotle's  viewpoint  that  coin  is  barren  still  prevalent  in  mod- 
ern society? 

5.  (a)   Show  by  diagram  how  the  market  rate  of  interest  is  determined 

by  the  demand  for  and  the  supply  of  loanable  funds. 

(b)  What  is  "negative"  interest? 

(c)  Does  the  "marginal"  investor  determine  the  current  rate? 

6.  (a)   Show  by  diagram  the  relationship  between  the  maturity  of  a  loan 

and  the  interest  rate  which  the  loan  bears. 

(b)  With  reference  to  the  preceding  diagram,  distinguish  between 
the  functions  of  commercial  and  investment  banking. 

7.  (a)   Distinguish  between  "true  income"  and  "premium  for  risk." 

(b)  What  kind  of  return  is  assumed  to  be  a  criterion  of  "true  in- 
come"? 

(c)  On  April  1,  1922,  the  Fourth  Liberty  4*4  per  cent  bonds  were 
selling  at  approximately  their  face  value.    What  was  the  premium 
on  this  date,  for  risk  involved  in  the  purchase  of  the  following 
securities : 

North  American  Edison  Co.  bonds  on  a  6.60  per  cent  basis. 
Delaware  and  Hudson  Co.  bonds  on  a  5.70  per  cent  basis. 
State  of  Oregon  bonds  on  a  4.30  per  cent  basis. 
Manati  Sugar  Co.  bonds  on  a  7.50  per  cent  basis. 
Great  Northern  Preferred  stock  on  a  9.70  per  cent  basis. 

(d)  What    should    be    the    relationship    between    true    income    and 
premium  for  risk  in  an  investment? 

8.  Why  is  it  advisable  that  the  investor  be  assured  that  the  amount  of  his 
commitment  is  to  be  used  for  a  productive  purpose  ? 

9.  In  what  sense  is  every  true  investment  commitment  really  a  divest- 
ment ? 

10.  (a)   What  has  been  the  volume  of  new  investment  securities  marketed 

in  the  United  States  during  each  of  the  past  three  years? 

(b)  How  do  these  totals  compare  with  the  total  wealth  and  income  of 
the  people  of  the  United  States? 

(c)  What  were  the  respective  percentages  of  total  income  received  as 
dividends  and  as  interest  as  shown  by  the  United  States  income 
tax  returns  for  1918? 

11.  In   1885  a  municipality  purchased  a  fire  engine  at  a  cost  of  $6,000. 
Payment  was  arranged  through  the  sale  of  twenty-year  6  per  cent 
bonds  at  par.     At  the  maturity  of  the  bonds  in  1905,  $1,000  in  bonds 
was  redeemed  and  the  balance  of  $5,000  refunded  in  fifteen-year  7  per 
cent  bonds  at  par.     In  1920  the  refunding  bond  issue  was  still  out- 
standing and  the  fire  engine  had  been  in  the  junk  heap  for  twenty 
years.    What  was  the  total  cost  of  the  fire  engine  to  the  citizens  of  the 
town? 


CHAPTER  II 
FORMS  OF  INVESTMENT  SECURITIES 

1.  (a)   Distinguish  between  a  share  of  stock  and  a  stock  certificate. 

(b)  Compare  the  American  term  "bond"  with  the  English  term  "de- 
benture". 

(c)  Why  are  the  bond  issues  of   New  York   City  called  corporate 
stock  ? 

(d)  What  is  the  fundamental  difference  between  the  position  of  the 
bondholder  and  that  of  the  stockholder  with  regard  to  income  and 
risk? 

(e)  Upon  what  is  the  income  of  a  stockholder  contingent? 

(f)  Why  are  shares  of  stock  said  to  be  fungible? 

2.  (a)   What  is  meant  by  the  "par  value"  of  a  security? 

(b)  What  is  the  usual  par  value  of  a  share  of  stock  and  of  a  bond? 

(c)  What  is  the  par  value  of  a  share  of  stock  in  each  of  thefollowing 
companies :     Pennsylvania  Railroad  Co. ;  General  Electric  Com- 
pany; Pierce  Oil  Corporation;  Kennecbtt  Copper  Corporation. 

3.  (a)   What  is  the  relationship  between  market  value  and  par  value  ?v« 
(b)   Why  do  many  companies  issue  stock  without  par  value? 

4.  (a)   Why  are  certain  stocks  called  preferred  stocks? 
(b)   May  preferred  stocks  be  issued  without  par  value? 

What  is  the  nature  of  the  preference  in  the  case  of  Cluett  Peabody 
Preferred  ? 

(d)  Does  preferred  stock  usually  have  voting  power? 

(e)  What  is  meant  by  cumulative  preferred  stock? 

(f )  What  has  been  the  experience  of  International  Mercantile  Marine 
and  American  Hide  and  Leather  with  cumulative  preferred  stock? 

'g)  Why  are  redeemable  and  convertible  features  usually  found  to- 
gether in  a  security? 

(j)  What  effect  have  the  redemption  and  conversion  features  had 
upon  the  market  price  of  Bethlehem  Steel  8  per  cent  preferred? 

5.  Referring  to  the  dividend  notice  on  page  19 : 

(a)  X  purchased  United  Gas  Improvement  stock  on  June  11,  1919, 
and  had  the  stock  transferred  to  his  own  name.     On  July  9  he 
sold  the  stock  to  Y,  who  immediately  had  it  transferred  on  the 
books  of  the  company.     To   whom    will    the    dividend   check    be 
mailed  on  July  15? 

(b)  Why  is  Y's  purchase  regarded  as  an  "ex-dividend"  transaction? 

6.  In  what  various  forms  may  dividends  be  paid  ?  ^  I-  $-£j* 

7.  Why  do  stocks  usually  fluctuate  in  value  more  widely  than  bonds  ? 

8.  What  security  was  once  termed  "Idiot's  Delight,"  and  why  ? 

9.  In  1917,  the  Dodge  Brothers,  owning  20  per  cent  of  the  capital  stock  of 
the  Ford  Motor  Co.,  which  at  the  time  was  outstanding  to  the  total  of 

10 


12  Investment  Problems — Forms  of  Securities 

$2,000,000,  sued  the  company  to  compel  distribution  of  the  accumu- 
lated surplus  of  $120,000,000.  Henry  Ford,  as  the  principal  stock- 
holder owning  58  per  cent  of  the  stock,  objected  to  the  distribution 
because  he  claimed  that  the  funds  were  needed  for  the  proper  conduct 
of  the  business.  Could  the  Dodge  Brothers  compel  the  distribution? 

10.  The  Bethlehem  Steel  Corporation  in  1917  increased  its  capital  stock 
by  declaring  a  200  per  cent  stock  dividend  on  its  common  stock  and 
by  offering  new  stock  at  par  to  old  common  stockholders  to  the  extent 
of  100  per  cent  of  their  holdings.    What  was  the  purpose? 

11.  At  the  beginning  of  1922  the  North  American  Co.  offered  to  stock- 
holders the  privilege  of  subscribing  to  additional  stock  to  the  extent 
of  70  per  cent  of  their  holdings  at  par  ($50)  at  the  following  times : 
Up  to  Jan.  3,  1922,  15  per  cent;  from  then  until  Dec.  31,  1922,  20  per 
cent ;  from  then  until  June  30,  1923,  20  per  cent ;  from  then  until  Dec. 
31,  1923,  15  per  cent.    What  was  the  value  of  a  "right"  in  New  York 
on  March  1,  1922? 

12.  Distinguish  between  a  right  and  a  warrant. 

13.  (a)   What  was  the  nature  of  the  stock  option  warrants  attached  to  the 

5-year  6's  of  the  American  Light  and  Traction  Co.,  due  in  1925  ? 

(b)  What  was  the  nature  of  the  stock  option  warrants  attached  to  the 
10-year  7's  of  the  Phillips  Petroleum  Co.,  due  in  1931? 

(c)  In  either  of  the  above  cases,  did  the  warrants  prove  valuable? 

14.  What  special  provisions  apply  to  the  Goodyear  Tire  and  Rubber  Com- 
pany management  stock? 

15.  W^hat  is  the  conversion  feature  of  the  Reading  Second  Preferred,  and 
why  was  it  so  arranged? 

J6.    (a)   Name  an  adjustment  bond.. 

(b)  Why  are  adjustment  bonds  invariably  subject  to  prior  liens? 

(c)  What  is  the  purpose  of  the  issuance  of  adjustment  bonds? 

(d)  WThy  does  an  adjustment  bond  always  signify  caution  to  the  in- 
vestor ? 

(e)  What  is  the  nature  of  the  lien  securing  the  Seaboard  Adjustment 
5's  of  1949? 

17.  (a)   Name  a  bridge  bond. 

(b)  Are  the  First  4^'s  of  the  Terminal  R.  R.  Association  of  St. 
Louis,  bridge  bonds  ? 

(c)  \Vhat  is  the  security  behind  the  bonds  of  the  New  York  Connect- 
ing Railroad  Co.  ? 

18.  (a)   Name  a  car  trust  note. 

(b)  What  is  the  so-called   Philadelphia  plan  under  which  car  trust 
notes  are  issued? 

(c)  How  does  the  Philadelphia  plan  differ  from  the  New  York  plan  ? 

19.  (a)   May  companies  other  than  railroads  issue  equipment  notes? 

(b)  Are  marine  equipment  notes,  such  as  have  been  issued  by  the 
Grace  Steamship  Co.,  entitled  to  as  good  rating  as  railway  equip- 
ment notes? 


14  Investment  Problems — Forms  of  Securities 

20.  (a)   Name  an  extension  bond. 

(b)  How  many  times  has  the  maturity  date  of  the  New  York  and 
Erie  First  4's  been  extended? 

(c)  Why  is  the  interest  rate  reduced  in  certain  cases  of  extension, 
and  increased  in  other  cases  ? 

21.  (a)   What  is  the  significance  of  a  general  mortgage  bond? 

(b)  Why  is  such  a  mortgage  often  called  a  blanket  mortgage? 

22.  (a)   Name  an  improvement  bond. 

(b)  By  what  class  of  borrowers  are  improvement  bonds  usually 
issued  ? 

23.  (a)   Illustrate  the  use  of  interim  certificates. 

(b)  Why  is  it  preferable  to  hold  an  interim  certificate  rather  than  a 
receipt  from  the  selling  house  ? 

(c)  What  is  the  usual  period  for  which  interim  certificates  are  neces- 
sary? 

24.  (a)    Name  a  purchase-money  mortgage  bond. 

(b)   What  is  the  unusual  feature  of  a  purchase-money  mortgage? 

25.  (a)   Name  a  refunding  mortgage  bond. 

(b)  Do  refunding  mortgage  bonds  ever  hold  the  first  lien  upon  the 
property  pledged? 

(c)  What   is   understood    in   corporation    finance   by   the   expression 
"trading  on  the  equity"? 

(d)  Why  do  corporations  refund  rather  than  extinguish  their  indebt- 
edness ? 

(e)  W7hat  justification  has  the  Buffalo  General  Electric  Co.  for  term- 
ing certain  of  its  bonds  First  Refunding  Mortgage  bonds? 

(f)  Why  are  certain  bonds  of  the  Alabama  Power  Co.  termed  First 
Mortgage  Lien  and  Refunding  6's? 

(g)  Why  are  the  First  and  Refunding  Mortgage  bonds  of  the  Adi- 
rondack Power  and  Light  Corp.  so  called? 

(h)  Are  the  First  Consolidated  Mortgage  bonds  of  the  Atlanta  Con- 
solidated Street  Railway  Co.  secured  by  a  first  mortgage  on  the 
property  of  the  company? 

(i)  Are  the  First  Refunding  Mortgage  bonds  of  the  City  Water  Co. 
of  Chattanooga,  Tenn.,  secured  by  a  first  mortgage  on  the  cor- 
porate property? 

26.  What  types  of  securities  are  peculiar  to  reorganization  proceedings? 
What  claims  do  they  have  on  the  property  ? 

27.  The  bonds  of  the  Kansas  City  Terminal  Railway  Co.  are  guaranteed 
by  what  individual  companies? 

28.  In  what  manner  does  the  issue  of  the  First  Consolidated  Mortgage 
5's  of  the  Southern  Railway  Co.,  due  in  1994,  tend  to  unify  the  in- 
debtedness of  the  company? 

29.  (a)   Name  a  prior  lien  bond. 

(b)  Why  do  holders  of  first  mortgage  bonds  sometimes  permit  prior 
liens  to  be  placed  upon  the  corporate  property,  as  was  the  case  in 
the  St.  Louis-San  Francisco  Railway  reorganization? 


16  Investment  Problems — Forms  of  Securities 

30.  (a)   Are  all  bonds  mortgage  bonds? 

(b)  Why  are  bonds  which  are  secured  by  a  second  or  third  mortgage 
usually  termed  refunding  or  consolidated  rather  than  second  or 
third? 

(c)  What  is  the  numerical  sequence  of  the  lien  which  the  Erie  Rail- 
road Convertible  4's  of  1953  hold  against  the  corporate  property? 

31.  (a)   What  is  a  debenture  bond? 

(b)  Are  the  debentures  proposed  in  the  Edge  amendment  to  the  Fed- 
eral Reserve  Act  to  be  secured  by  the  definite  pledge  of  property? 

(c)  What  is  the  security  behind  the  Debenture  6's,  due  2014,  of  the 
American  Gas  and  Electric  Co.  ? 

(d)  What  is  the  security  behind  the  Debenture  5's,  due  1926,  of  the 
Buffalo  and  Susquehanna  Iron  Co.? 

32.  (a)   Name  a  receiver's  certificate. 

(b)  What  claim  have  the  holders  of  receiver's  certificates  against  the 
corporate  property  ? 

(c)  Why  do  receiver's  certificates  seldom  bear  a  maturity  date  beyond 
three  years  ? 

(d)  How  were  holders  of  receiver's  certificates  treated  in  the  Atlanta, 
Birmingham  and  Atlantic  Railroad  reorganization  in  1914? 

33.  (a)   Name  a  collateral  trust  note. 

(b)  In  what  class  of  companies  is  this  form  of  security  most  generally 
found  ? 

(c)  Why  is  it  difficult  to  analyze  the  investment  position  of  collateral 
trust  notes? 

34.  (a)   Distinguish  between  guaranteed,  endorsed,  and  assumed  bonds. 

(b)  What  position  do  the  holders  of   guaranteed  securities   occupy 
with  respect  to  priority  of  claim  against  the  earnings  of  the  guar- 
anteeing company? 

(c)  Does  the  investment  position  occupied  by  the  Morris  and  Essex 
First  Refunding  2>l/2 's  of  2000,  arise  because  of  the  Delaware, 
Lackawanna  and  Western  guarantee  ?  Would  the  bonds  command 
their  current  price  if  the  guarantee  were  removed? 

(d)  Does  the  investment  position  occupied  by  the  Fifth   Mortgage 
Extended  4's  of  1928  of  the  New  York  and  Erie  R.  R.  arise  be- 
cause the  obligation  for  the  payment  of  interest  and  principal  has 
been  assumed  by  the  Erie  R.  R.  Co.?    What  would  be  the  effect 
if  the  Erie  assumption  were  to  be  cancelled? 

(e)  Certain  of  the  Houston,  East  and  West  Texas  Railway  First 
Mortgage  5's,  due  in  1933,  are  stamped  with  the  notation  that  the 
Southern  Pacific  Co.  guarantees  payment  of  interest  and  principal. 
Other  bonds  of  the  same  issue  have  not  been  so  stamped,  with  the 
result  that  the  issuing  company  is  the  sole  obligor.     Should  the 
stamped  or  unstamped  bonds  command  the  better  market? 

(f)  Why  did  the  German  stamp  on  Japanese  bonds  offered  in  the 
United  States  in  1915  affect  the  market  price  of  the  bonds? 

(g)  During  the  construction  of  the  Western  Pacific  Railroad  the  bonds 
of  the  company  were  sold  bearing  the  guarantee  of  the  Denver 


18  Investment  Problems — Forms  of  Securities 

and  Rio  Grande  Railroad  as  to  interest  payment.  The  Western 
Pacific  was  unable  to  meet  the  interest  payments,  following  which 
the  Denver  and  Rio  Grande  defaulted  in  its  guarantee  under  the 
claim  that  it  could  not  meet  the  obligation.  Could  the  Denver  and 
Rio  Grande  be  compelled  to  make  the  payments  ? 

35.  (a)   Name  a  real  estate  mortgage  bond. 

(b)   Compare  real  estate  mortgage  bonds  with  other  types  of  bonds 
from  the  standpoint  of  relative  marketability. 

36.  (a)   Why  do  some  bonds  contain  sinking  fund  provisions  ? 

(b)  To  what  extent  does  the  operation  of  a  sinking  fund  help  the  in- 
vestment position  of  the  bonds? 

(c)  Which  of  the  following  methods  of  making  payments  into  a  sink- 
ing fund  is  more  satisfactory  from  the  standpoint  of  the  investor? 

(1)  In  proportion  to  earnings. 

(2)  As  a  fixed  amount. 

(d)  To  what  extent  may  a  company  be  compelled  to  live  up  to  its 
sinking  fund  agreement? 

(e)  What  are  the  sinking  fund  provisions  in  connection  with  each  of 
the  following  bonds : 

(1)  Colorado  Industrial  Co.  First  5's  of  1934. 

(2)  United  States  Steel  Sinking  Fund  5's  of  1963. 

(3)  Baldwin  Locomotive  First  5's  of  1940. 

(4)  Anaconda  Copper  Secured  6's  of  1929. 

(5)  American  Can  Debenture  5's  of  1928. 

(6)  Atlanta  Gas  Light  First  5's  of  1947. 

37.  (a)   Why  is  the  interest  upon  income  bonds  regarded  as  a  contingent 

charge  ? 

(b)  What  justification  is  there   for  the  statement  that  "the  income 
bondholder  may  find  that  he  has  purchased  a  lawsuit  rather  than 
a  security"  ? 

(c)  Interpret  the  following  statement :     "The  security  of  the  income 
bondholder  is  the  willingness  of  a  board  of  directors,  of  which  he 
has  no  share  in  the  choosing,  to  pay  over  to  him  sums' of  money 
which  they  have  a  perfect  right  to  expend  on  the  improvement  of 
the  property,  a  task  which  is  never  completed." 

(d)  Under  what  conditions  is  interest  paid  on  the  following  income 
bonds : 

(1)  Hudson  and  Manhattan  Adjustment  Income  5's  of  1957. 

(2)  St.  Louis-San  Francisco  Income  6's  of  1960. 

(3)  Elmira  and  Williamsport  Income  5's  of  2862. 

(e)  What  is  the  difference  in  the  manner  in  which  income  bonds  are 
quoted  in  contrast  with  other  bonds? 

38.  (a)   Why  are  the  United  States  Panama  Canal  bonds  regarded  as  tax- 

free  bonds  ? 

(b)  To  what  extent  is  the  income  from  United  States  Steel  common 
stock  tax  exempt? 

(c)  The  Baldwin  Locomotive  First  5's  of  1940  contain  a  covenant  that 
the  principal  and  interest  is  payable  with  deduction  for  any  taxes 


20  Investment  Problems — Forms  of  Securities 

which  the  Company  may  be  required  to  pay  or  retain.     To  what 
extent  is  this  covenant  of  advantage  to  a  bondholder  ? 

39.  What  are  the  various  ways  in  which  a  bond  may  be  convertible  with 
respect  to  (a)  conversion  period ;  (b)  conversion  ratio ;  and  (c)  secur- 
ity into  which  convertible? 

40.  What  are  the  various  ways  in  which  a  bond  may  be  redeemable  with 
respect  to  (a)  time  of  redemption;  and  (b)  redemption  price? 

41.  (a)  Does  the  conversion  feature  improve  the  investment  position  of 

the  New  York,  New  Haven  and  Hartford  Debenture  6's  due  in 
1948? 

(b)  Has  the  conversion  feature  any  effect  upon  the  current  price  of 
the  Chicago,  Milwaukee  and  St.  Paul's  5's  of  2014? 

(c)  Has  the  conversion  feature  any  effect  upon  the  current  price  of 
the  American  Telephone  and  Telegraph  6's  of  1925? 

42.  (a)   Has  the  redemption  feature  any  effect  upon  the  market  price  of 

the  American  Agricultural  Chemical  First  Refunding  7^'s  of 
1941? 

(b)  Has  the  redemption  feature  any  effect  upon  the  market  price  of 
the  Government  of  Switzerland  8's  of  1940? 

(c)  What  inducement  was  offered  to  the  holders  of  the  Houston,  East 
and  West  Texas  First  5's  by  the  Southern  Pacific  to  permit  the 
stamping  of  a  redemption  feature  upon  the  bonds? 

43.  What  is  the  maturity  date  on  each  of  the  following  issues : 

(a)  United  States  Government  4's,  issued  in  1895. 

(b)  Republic    of  France  6's,  issued  in  1920. 

(c)  West  Shore  First  4's,  issued  in  1885. 

(d)  Commercial  Cable  First  4's,  issued  in  1897. 

(e)  Elmira  and  Williamsport  Income  5's,  issued  in  1863. 

(f)  Lehigh  Valley  Annuity  6's,  issued  in  1873. 

(g)  Public  Service  Corp.  of  N.  J.  Perpetual  6's,  issued  in  1903. 
(h)   British  Consols  and  French  Rentes. 

44.  (a)   What    is    the   plan  of  redemption  of  the  Missouri  Pacific  6  per 

cent  Equipment  Trust  notes,  due  up  to  1935? 

(b)   For  what  purposes  additional  to  the  purchase  of  railroad  equip- 
ment are  bonds  issued  with  serial  maturities? 

45.  (a)   Show  how  the  use  of  series  mortgage  bonds  is  illustrated  in  the 

case  of  the  Chicago,  Milwaukee  and  St.  Paul  General  Mortgage 
bonds  due  in  1989. 

(b)  Why  does  each  series  bear  an  interest  rate  different  from  that  of 
the  other  series? 

(c)  In  what  respect  do  the  general  mortgage  series  bonds  of  the  Penn- 
sylvania differ  from  those  of  the  St.  Paul? 

46.  Are  each  of  the  following  bonds  joint  and  several  obligations? 

(a)  Chicago  Union  Station  First  4^'s  of  1963. 

(b)  Northern  Pacific-Great  Northern  Convertible  6^'s  of  1936. 

(c)  Copper  Export  Assn.  8's  of  1925. 


22  Investment  Problems — Forms  of  Securities 

47.  Discuss  the  Port  Wentworth  (Ga.)  First  8's  of  1950  with  respect  to 
profit-sharing,  conversion,  and  sinking  fund  features. 

48.  (a)  Why  did  the  Union  Pacific  4's  of  1927  sell  in  1909  as  high  as 

124^4? 

(b)  Why  did  these  bonds  sell  as  low  as  78^4  in  1907,  when  the  com- 
mon stock  of  the  company  was  at  100? 

49.  (a)   What  is  the  participation  feature  of  the  Marland  Oil  8's  of  1931  ? 
(b)   What  effect  has  this  feature  upon  the  value  of  the  stock  option 

warrants  attached  to  the  bonds? 

50.  On  March  31,  1922,  United  States  Liberty  Second  4's  closed  at  98.74 
for  the  coupon  bonds  and  98.00  for  the  registered.     Account  for  the 
difference  in  price. 

51.  (a)   In  1908  Central  Railroad  of  N.  J.  General  5's,  due  in  1987,  sold 

at  130^.    Is  it  usual  for  a  bond  to  sell  so  high?    What  was  the 
reason  in  this  case? 

(b)  In  1907  the  Lorillard  Debenture  7's,  due  in  1944,  sold  at  128. 
What  factors  obtained  in  the  Lorillard  case  which  differed  from 
those  in  the  preceding  instance? 

52.  What  is  unusual  about  the  conversion  feature  included  in  the  North- 
ern Pacific-Great  Northern  convertible  6^'s  of  1926? 

53.  The  Canadian  Pacific  Railway  Co.  in  1921  sold  what  was  termed  4  per 
cent  Consolidated  Debenture  stock  in  bearer  form,  with  interest  cou- 
pons attached.    Was  this  really  a  stock  or  a  bond? 


CHAPTER  III 
TESTS  OF  INVESTMENT 

1.  (a)   What  are  the  three  primary  considerations  in  every  investment? 

(b)  Are  the  three  interdependent  or  independent  of  each  other? 

(c)  What  is  understood  by  the  term  "marketability"  ? 

2.  (a)   In  the  current  purchase  of  Cincinnati  Gas  and  Electric  First  and 

Refunding  5's  due  in  1956,  should  the  investor  inquire  more 
closely  into  the  ability  of  the  company  to  pay  the  principal  at 
maturity,  or  to  pay  the  interest  charges  during  the  lifetime  of 
the  bond  ? 

(b)  If  it  is  assumed  that  the  purchaser  of  a  bond  pays  a  price  which 
is  the  present  value  of  the  interest  payments  and  the  principal, 
what  is  paid  for  when  British  Consols — which  have  no  maturity 
date — are  bought  ? 

(c)  Is  the  purchaser  of  Commercial  Cable  4's,  due  in  2397.  in  the 
same  position  as  far  as  present  value  of  principal  is  concerned, 
as  the  purchaser  of  British  Consols  ? 

3.  May  the  security  of   principal   of   an  investment  be  checked   more 
readily  from  the  balance  sheets  or  the  income  statements  of  the  debtor 
company  ? 

4.  Refer  to  problems  Nos.  4  and  5  in  Chapter  1. 

(a)  How  is  investment  income  measured? 

(b)  Distinguish  between   "nominal"   yield   and   "net"  or  "effective" 
yield. 

(c)  What   determines  the  prevailing  rate   of   return   on   investment 
securities  ? 

(d)  Why  did  the  securities  stated  in  problem  7  (c)  of  Chapter  1  com- 
mand varying  rates  of  income? 

(e)  How  is  the  basic  rate  of  interest  determined? 

(f)  How  may  the  basic  rate  be  ascertained? 

(g)  What  is  the  current  rate  of  interest  under  the  following  classi- 
fications : 

(1)  Call  money  at  New  York. 

(2)  Bank  rate  on  90-day  commercial  loans. 

(3)  Federal  Reserve  rediscount  rate  on  90-day  paper. 

(4)  Net  yield  on  Fourth  Liberty  4^'s  of  1938. 

5.  (a)   Does  the  market  price  of  a  security  determine  the  yield,  or  does 

the  yield  determine  the  market  price  ? 

(b)  Delaware  and  Hudson  stock  pays  9  per  cent  dividends.  Show 
by  diagram  the  effect  upon  the  market  price  of  the  stock  if  the 
rate  of  investment  income  should  vary  from  4  per  cent  to  10 
per  cent  in  steps  of  ^2  of  1  per  cent  each. 

24 


26  Investment  Problems — Tests 

6.  Complete  the  following  table  which  aims  to  classify  investment  securi- 
ties according  to  the  current  yield : 

Class  Income  range 

Gilt-edge   Not  exceeding % 

High-grade    %  to % 

Good   %  to % 

Fair    %  to % 

Speculative    All  over % 

7.  Early  in  1922  the  common  stock  of  Public  Service  of  New  Jersey 
was  selling  at  a  lower  yield  than  the  bonds  of  the  same  company. 
Why  ?  Also  account  for  the  fact  that  at  the  same  time  United  States 
Steel  common  was  selling  to  yield  less  than  the  preferred. 

8.  In  April  of  1922  Standard  Oil  of  New  Jersey  common  was  selling 
to  yield  slightly  over  2  per  cent.   The  yield  would  indicate  ultra-safe 
investment  opportunity.   Was  such  the  case? 

9.  Account  for  the  fact  that  in  May  of  1920  the  Anglo-French  5's,  due 
the  following  October,  were  selling  to  yield  over  10  per  cent. 

10.  In  January  of  1922,  Pennsylvania  common  was  selling  to  yield  well 
under  6  per  cent,  whereas  stocks  of  the  same  class,  such  as  New  York 
Central  and  Atchison,  were  yielding  above  6  per  cent.    Why? 

11.  (a)  Upon  what  does  stability  of  investment  income  depend? 
(b)  What  is  meant  by  "terms  of  the  investment  contract"? 

12.  The  annual  reports  for  1921  operations  showed  that  the  manufac- 
turers of  the  Victor  phonograph  realized  satisfactory  profits,  whereas 
the  makers  of  the  Columbia  incurred  heavy  losses.    Analyze  the  re- 
ports to  determine  why  this  was  so. 

13.  Why  have  securities  of  railroads  and  public  utility  companies  in  gen- 
eral an  inherent  superiority  over  those  of  industrial  companies  ? 

14.  (a)   Upon  what   factors  does  the  marketability  of  a  security  depend? 

(b)  How  much  does  marketability  cost  in  the  average  security,  i.  e., 
what  is  the  difference  in  income  yield  between  two   securities 
equally  good  in  all  respects  other  than  marketability? 

(c)  How  may  the  marketability  of  a  security  be  judged? 

(d)  To  \vhat  extent  does  the  "collateral"  value  of  a  security  depend 
upon  marketability? 

(e)  In  pledging  securities  as  collateral  for  a  bank  loan,  does  title 
pass  to  the  bank?    What  is  the  ordinary  margin  of  safety  re- 
quired by  the  bank  ? 

(f)  Does  the  fact  that  a  security  is  listed  on  a  stock  exchange  add 
to  its  marketability? 

(g)  To  what  important  class  of  investors  is  marketability  of  chief 
importance?    To  what  other  important  class  is  it  of  secondary 
importance? 

(h)   In  March  of  1922,  Bethlehem  Steel  Common  was  selling  at  59, 
whereas  Bethlehem  Steel  Common  Class  B — identical  with  the 


23  Investment  Problems — Tests 

straight  common  except  that  th^  Class  B  has  no  voting  power- 
was  selling  at  64.    Account  for  the  price  difference. 
(i)    In  January  of   1922.  Eastman  Kodak  stock  was  quoted  at  650 
and  Erie  Common  at  10.    If  a  quantity  of  each  with  an  equal 
market  value  were  offered  as  collateral  for  a  loan,  which  would 
a  banker  prefer  ? 

15.  The  Federal  income  tax,  effective  in  1922,  upon  a  taxable  income  of 
$50,000  amounts  to  17.28  per  cent.    An  investor  with  a  taxable  in- 
come of  that  amount  purchased  that  year  a  bond  which  yielded  6  per 
cent  before  taxes.    What  was  the  yield  after  Federal  taxes  ?   Would 
it  have  been  more  advisable  for  that  investor  to  have  purchased  a 
tax-free  bond  to  yield  5  per  cent? 

16.  (a)  Why  does  the  date  of  maturity  have  a  definite  effect  upon  the 

rate  of  interest  which  a  bond  bears,  the  yield  at  which  the  bond 
may  be  purchased,  and  the  price  at  which  the  bond  sells  ? 

(b)  Account  for  the  range  of  prices  on  the  Northern  Pacific  General 
Lien  3's  of  2047  from  1900  to  the  present  time. 

(c)  Why  is  it  desirable  that  the  maturity  dates  of  the  securities  held 
in  an  investment  fund  be  diversified  ? 

(d)  What  relationship  has  maturity  date  to  reinvestment? 

17.  Why  is  the   fact  that  the   Government  of   Newfoundland   5^'s  of 
1942  are  "non-callable,"  advertised  as  an  inducement  for  the  sale  of 
the  bonds? 

18.  What  disadvantages   arise   in   connection   with   sinking   fund   bonds 
where  the  fund  is  used  to  repurchase  bonds  which  are  drawn  for 
redemption  ? 

19.  An  investor  recently  purchased  $50,000  in  the  bonds  of  an  Arkansas 
municipality.    Later  he  learned  that  this  was  the  entire  amount  out- 
standing.   What  disadvantage  was  involved? 

20.  (a)   May  a  smaller  sum  than  $1,000  be  invested  in  a  single  security? 

(b)  Should  a  person  of  limited  means  invest  $2,000  in  two  $1,000 
bonds,  or  in  more  pieces  of  smaller  denominations? 

(c)  Why  was  the  par  value  of   the  common  stock  of  the   Standard 
Oil   Company  of  New  Jersey   reduced   from  $100  to  $25   per 
share  on  December  20,  1920? 

(d)  Eastman  Kodak  common  stock  was  quoted  on  April  5,  1922,  at 
$740  per  share.    What  is  the  practical  objection  to  such  a  high 
price?   How  may  this  condition  be  remedied? 

21.  What  factors  cause  the  market  value  of  a  security  to  change  from 
time  to  time? 


CHAPTER  IV 
UNITED  STATES  GOVERNMENT  BONDS 

1.  (a)   What  pre-war  issues  of  United  States  Government  bonds  re- 

main outstanding? 

(b)  Where  is  the  principal  market  for  these  bonds  ? 

(c)  Which  of  these  issues  may  be  used  as  security  for  bank-note 
circulation  ? 

(d)  On  April  1,  1922,  the  U.  S.  4's  of   1925  were  quoted  at  106. 
Show  how  a  national  bank  might  profit  through  the  purchase  of 
these  bonds  for  circulation  purposes. 

(e)  What  provision  is  made  in  the  Federal  Reserve  Act  for  the  re- 
tirement of  the  pre-war  bond  issues? 

2.  Prepare  a  table  showing  the  gross  public  debt  arranged  according 
to  maturity  dates. 

3.  With  reference  to  the  Liberty  Loan  bonds : 

(a)  Show  how  the  various  issues  came  into  existence. 

(b)  Explain  the  tax  exemption  features  of  each  of  the  issues. 

(c)  What  is  the  maximum  amount  of  bonds  which  may  be  held  as 
tax-free?   Show  how  this  amount  is  made  up. 

(d)  Why  have  the  First-Second  Converted  4^4 's  sold  out  of  line 
with  the  other  4^4  per  cent  issues? 

(e)  What  are  the  sinking  fund  provisions  with  regard  to  each  of 
the  outstanding  issues? 

4.  With  reference  to  the  Treasury  certificates  of  indebtedness : 

(a)  What  was  the  original  purpose  of  the  issuance  of  these  certifi- 
cates during  the  war? 

(b)  Was  it  contemplated  that  they  should  comprise  a  permanent  fea- 
ture of  Treasury  financing? 

(c)  What  are  the  various  issues  outstanding? 

(d)  Would  it  be  advisable  to  fund  the  outstanding  certificates  into 
a  long-term  bond? 

(e)  To  what  class  of  investors  do  the  certificates  have  an  especial 
appeal  ? 

5.  With  reference  to  Federal  Farm  Loan  securities : 

(a)  Outline  briefly  the  Federal  Farm  Loan  system. 

(b)  Distinguish  between  Federal  Farm  Loan  Banks  and  Joint  Stock 
Land  Banks. 

(c)  Why  are  these  bonds  regarded  as  "instrumentalities  of  the  United 
States  Government"  ? 

(d)  What  is  the  tax  position  of  these  securities? 

(e)  On  April  4,  1922,  stock  in  the  First  Joint  Stock  Land  Bank  of 
Chicago  was  offered  at  "135  and  accrued  dividend."    The  cur- 
rent dividend  rate  was  9  per  cent.    Analyze  this  security  with 
respect  to  yield,  tax  position,  and  dividend  prospect. 

(f)  Where  is  the  principal  market  for  the  sale  of  these  securities? 

30 


:2  Investment  Problems — U.S.  Government  Bonds 

6.  Outline  the  investment  position  of  the  postal  savings  bonds. 

7.  (a)   What  is  the  present  total  of  the  public  debt  and  how  does  this 

amount  compare  with  the  maximum  reached  in  August,  1919? 

(b)  What  is  the  annual  interest  charge  on  the  public  debt  and  how 
does  this  amount  compare  with  total  Federal  expenditures  an- 
nually preceding  the  World  War? 

(c)  What  is  the  relationship  between  total  ordinary  revenues  and 
expenditures  for  the  current  fiscal  year  to  date,  and  what  is  the 
effect  upon  outstanding  Federal  securities? 


CHAPTER  V 
STATE  BONDS 

1.  Read  carefully  the  tenth  and  eleventh  amendments  to  the  Constitution 
of  the  United  States  and  explain  the  effect  of  these  amendments  upon 
the  investment  position  of  State  bonds. 

2.  (a)  X,  a  resident  of  South  Dakota,  held  bonds  of  the  State  of  North 

Carolina  in  default.     Could  X  sue  for  payment? 

(b)  Could  X  recover  by  having  his  State  government  sue  North  Caro- 
lina? 

(c)  Could  X  make  a  gift  of  his  bonds  to  South  Dakota  and  then  could 
South  Dakota  sue? 

(d)  Could  X  agree  with  South  Dakota  to  share  in  the  proceeds  of  a 
successful  suit? 

3.  Comment  upon  the  appended  financial  statement: 

FINANCIAL  STATEMENT 
STATE  OF  OREGON 

April  1, 1922 

Assessed  valuation   $1,020,804,197 

Total  bonded  debt  42,695,125 

Population  1920  census 783,285 

4.  Compare  the  following  States  on  the  basis  of  indebtedness  per  capita : 
New  Hampshire,  Massachusetts,  Connecticut,  New  York,  New  Jersey, 
Pennsylvania,  Ohio,   Illinois,  Missouri,   Mississippi,  Texas,  Kansas, 
California. 

5.  Review  the  conditions  under  which  Pennsylvania  defaulted  in  1842; 
Illinois  in  1841;  Mississippi  in  1840;  Texas  in  1848;  California  in 
1854;  Virginia  in  1872. 

6.  (a)   What  are  the  five  leading  restrictions  governing  the  creation  of 

State  debts  usually  found  in  State  constitutions  ? 

(b)  What  are  the  constitutional  restrictions  in  this  State? 

(c)  Why  were  the  "Soldier  Bonus"  bonds  held  to  be  unconstitutional 
in  New  York  State  in  1921  ? 

(d)  A  large  share  of  the  debt  of  New  York  covers  bonds  issued  for 
transforming  the  old  Erie  Canal  into  a  barge  canal.     Has  this 
proved  a  "productive  enterprise"? 

7.  Write  out  the  debt  statement  of  this  State  with  the  purposes  for  which 
the  bonds  were  issued. 

8.  What  is  the  percentage  of  negro  population  in  each  of  the  South  At- 
lantic States  and  what  effect  has  this  condition  upon  the  investment 
status  of  the  bonds  of  those  States? 

9.  How  are  sinking  fund  purchases  arranged  by  State  governments? 

34 


36  Investment  Problems — State  Bonds 

10.  What  is  the  investment  position  of  the  State  of  Georgia,  Western  and 
Atlantic  Railroad  5  per  cent  Rental  Assignment  Certificates,  due  1922- 
1927? 

11.  Account  for  the  variance  in  the  yield  of  the  following  New  York 
State  bonds : 

(a)  3's     of  1959. 

(b)  4's      of  1961. 

(c)  4j£'sofl963. 

12.  (a)   Why  has  the  State  of  Louisiana  refused  to  redeem  the  so-called 

baby  bonds  which  were  due  in  1886? 

(b)   Why  did  not  this  default  cause  the  bonds  of  the  State  to  lose 
their  status  as  "legal  investments"  for  New  York  savings  banks  ? 

13.  What  is  the  investment  position  of  the  State  of  Louisiana  Port  Com- 
mission Serial  Canal  5's,  due  1929-1958? 

14.  Account  for  the  following  trend  in  the  yield  of  New  York  State  bonds  : 

1900 2.65% 

1905  3.50 

1910  3.78 

1915  3.95 

1920 4.10 

1921  4.70 

1922  .  .  4.00 


CHAPTER  VI 
MUNICIPAL  BONDS 

1.  With  reference  to  the  municipal  financial  statement  which  appears  on 
page  77 : 

(a)  Does  the  total  bonded  debt  include  the  school  debt? 

(b)  Why  is  the  water  debt  treated  as  a  deduction? 

(c)  In  what  different  ways  may  the  sinking  fund  be  invested  ? 

(d)  What  is  the  basis  for  assessment  valuations  ? 

(e)  What  percentage  of  the  assessed  valuation  is  the  net  debt? 

(f)  What  purpose  is  served  by  stating  the  tax  rate  and  the  popula- 
tion? 

2.  Analyze  the  effect  of  the  creation  of  the  following  tax  districts  upon 
the  bonds  of  municipalities  within  the  districts : 

(a)  Miami  Conservancy  District,  Ohio. 

(b)  Indianapolis  School  District,  Indiana. 

(c)  Port  District,  New  York  and  New  Jersey. 

(d)  Canaseraga  Creek  Improvement  District,  New  York. 

3.  Why  is  a  debt  percentage  of  5  per  cent  in  Massachusetts  usually  a 
better  showing  than  a  3  per  cent  debt  in  Illinois? 

4.  In  what  respect  do  municipal  bonds  issued  in  the  New  England  States 
differ  fundamentally  from  those  of  other  States? 

5.  (a)   What  are  the  legal  restrictions  upon  the  creation  of  municipal  debt 

in  this  State? 

(b)  Distinguish  between  a  tax  limit  as  imposed  in  Ontario  and  a  debt 
limit  as  imposed  in  New  York. 

(c)  Does  an  absolute  tax  limit  affect  the  credit  of  a  city? 

(d)  What  are  the  usual  purposes  for  which  a  municipality  may  bor- 
row? 

(e)  What  was  the  percentage  borrowed  for  each  purpose  during  the 
past  year  ? 

(f )  What  are  the  four  chief  reasons  for  which  municipal  bonds  have 
been  held  invalid? 

6.  (a)  A  city  in  New  York  has  a  net  debt  of  $1,234,568,  which  is  ap- 

proximately the  debt  limit  of  the  city.  The  municipality  desires 
to  borrow  $100,000  to  construct  a  storm  sewer  through  the  city. 
How  may  this  be  accomplished? 

(b)  A  city  in  Minnesota  desires  to  borrow  $300,000  to  aid  a  local  rail- 
road company.    May  it  do  so? 

7.  Explain  the  application  of  the  principle  of  caveat  emptor  to  the  pur- 
chase of  municipal  bonds. 

8.  Distinguish    between    direct    and    limited    obligations    in    municipal 
bonds. 

9.  (a)   What  is  known  as  debt  service? 

(b)  Why  is  personal  property  stated  separately  in  assessment  valua- 
tions ? 

38 


40  Investmcn  t  Problems — Municipal  Bonds 

(c)  What  items  are  allowable  deductions  in  computing  net  debt  ? 

(d)  What  should  be  the  ratio  of  net  debt  to  assessed  valuation? 

10.  (a)   Discuss  the  Massachusetts  and  Ontario  requirements  as  to  the 

maturity  date  of  bond  issues. 

(b)   For  what  period  should  bonds  for  the  following  purposes  be  is- 
sued :  parks,  schools,  streets,  cemetery. 

11.  (a)   What  is  a  municipal  irrigation  district? 

(b)  WThat  States  have  irrigation  commissions  and  what  is  the  func- 
tion of  the  commissions? 

(c)  How  are  irrigation  district  bonds  certified? 

(d)  Distinguish  between  the  terms  "irrigation"  and  "water  conserva- 
tion". 

12.  (a)  Why  are  refunding  bonds  unpopular  among  municipals? 
(b)  What  States  permit  this  practice? 

13.  For  a  selected  county,  such  as  Albany  County  in  New  York  State, 
compute  the  total  debt  percentage  of  the  values,  taking  all  the  debt 
for  which  the  values  are  liable.   Allot  to  the  area  a  part  of  the  State 
debt  in  proportion  to  the  relationship  between  the  total  State  valua- 
tion and  the  valuation  of  the  area  selected. 

14.  \Vhat  is  the  advantage  of  an  approval  of  a  bond  issue  by  referendum? 

15.  How  should  redemption  of  a  municipal  bond  be  assured? 

16.  A  city  desires  to  borrow  $1,000,000  for  20  years  at  4  per  cent.  Which 
will  be  the  more  economical  plan  of  payment — sinking  fund  or  serial 
maturities  ? 

17.  Under  what  conditions  are   municipal  bonds   legal  investments   for 
savings  banks  in  New  York? 

18.  With  reference  to  the  purchase  of  municipal  bonds  by  investment 
houses : 

(a)  What  are  the  advantages  and  disadvantages  to  the  city  and  to 
the  investment  houses  of  (1)  public  sale  and  (2)  private  sale? 

(b)  What  is  meant  by  an  "all  or  none"  bid? 

(c)  Why  is  it  desirable  that  offerings  below  par  be  considered  ? 

(d)  The  City  of  Centralia,  Wash.,  at  one  time  sold  bonds  at  a  dis- 
count, although  the  State  law  forbids  such  practice.    Five  years 
later  an  attempt  was  made  to  invalidate  the  bonds.    To  what 
extent  were  the  holders  affected? 

(e)  Discuss  the  Dutch  method  of  allotting  bonds  on  the  basis  of  the 
lowest  bid  accepted,  in  comparison  with  the  American  practice 
of  the  highest  aggregate  bid. 

19.  On  January  25,   1921,  the  City  of  Yonkers,  N.  Y.,  desired  to  sell 
$2,312,000  in  bonds.    The   following  statement  shows  the  financial 
condition  of  the  city  on  that  date : 

Assessed  valuation   $178,123,037 

Net  debt   12,490,749 

(a)  Could  the  bonds  be  legally  issued? 

(b)  To  the  extent  of  what  total  could  additional  bonds  be  issued? 


42 


Investment  Problems — Municipal  Bonds 


20.  From  the  appended  statement  determine  for  each  city : 

(a)  Percentage  of  net  debt. 

(b)  Per  capita  net  debt. 

(c)  Effect  upon  debt  percentage  of  valuation  basis. 

(d)  Legal  status  in  New  York. 

REPRESENTATIVE  AMERICAN  CITIES,  1920. 

Assessed 

City                          Population  valuation 

Montgomery,    Ala 43,464  $24,174,000 

Little  Rock,  Ark 65,142  29,279,000 

Pasadena,  Cal.    ..." 45,354  52,128,000 

Denver,  Col 256,491  223,671,000 

Indianapolis,   Ind 314,194  185,031,000 

Grand  Rapids,  Mich 137,634  127,544,000 

Portland,  Ore 258,288  225,629,000 

Wheeling,  W.  Va 56,208  39,783,000 

Albany,  N.  Y 113,344  .     107,749,790 

Duluth.   Minn 98,917  48,555,000 

Poughkeepsie,  N.  Y 35,000  33,212,000 

21.  In  February,  1921,  an  investor  made  an  even  exchange  of  $13,700,000 
in  par  value  of  4  per  cent  railroad  bonds  for  $10,000,000  in  New 
York  City  4^'s  of  1971.   How  much  did  he  gain  or  lose  by  the  trans- 
action?    (Assume   identical   conditions   with   regard  to   payment   of 
the  bonds  at  maturity.) 

22.  What  is  the  importance  of  having  the  legal   features  of  municipal 
bonds  approved  by  qualified  counsel? 

23.  Prepare  tables  showing  for  each  of  the  past  five  years : 

(a)  the   relative  percentages   of   municipal  bonds   sold  according  to 
interest  rates. 

(b)  the  relative  percentages  of  municipal  bonds  sold  according  to  pur- 
pose of  issue. 

24.  On  Dec.  15,  1921,  the  city    of  New  York  offered  $55,000,000  in  4*/2 
per  cent  bonds,  due  in  1971,  at  public  sale.    The  following  bids  were 
received : 


Valuation 

basis, 

Net 

per  cent 

debt 

33^ 

$2,817,000 

40 

1,550,000 

67 

2,386,000 

100 

14,345,000 

60 

6,804,000 

100 

'3,961,000 

75&50 

14,345,000 

100 

745,000 

88 

7,282,000 

40 

6,895,000 

75 

1,745,000 

Name  — 
Empire  Trust  Co  S 
Speyer  &  Co.,  Bank  of 
Manhattan     Co.,     A. 
B.  Leach  &  Co.,  Inc. 
Dominick     &     Domi- 
nick     
Robert  S.  Byfield  

Rutter   &   Co 

\mount.      Price 
5,000,000    102.33 
5,000,000    103.75 
5,000,000    103.65 
5,000,000    103.55 
5,000,000    103.45 

50,000    100.00 
100,000    104.25 
100,000    104.00 
100,000    103.75 
100,000    103.50 
100,000    103.25 
250,000    100.37 
250,000    100.57 
250,000    100.77 
250,000    101.07 
250,000    101.27 
250,000    101.47 
250,000    101.67 
250,000     101.87 

Name  —                            Amount.      Price 
Bankers  Trust  Co.   ...j        5,000    103.05 
|       5,000    103.10 
J.    P.    Morgan    &    Co., 
Chase  Securities  Co., 
First  National  Bank, 
National    City    Co., 
Guaranty  Co.,   Bank- 
ers' Trust  Co.,  Brown 
Bros.   &   Co.,   Harris, 
Forbes   &  Co                 55000000    10001 

Kountze  Brothers  

All  or  none    103.407 
Blair   &    Co.,    Hallgar- 
ten     &     Co.,     W.     R. 
Compton  Co.,  White, 
Weld   &   Co.,   Kissel, 
Kinnicutt  &  Co.,  New 
York  Trust  Co.,  Cen- 
tral Union  Trust  Co.55,000,000    102.551 
C.  W.  Whitis  &  Co...      150,000    103.60 

44 


Investment  Problems— Municipal  Bonds 


Name  — 
Farmers  Loan  &  Trust 
Co              

Amount.      Price 

50,000    100.00 
50,000    105.125 
20,000    102.50 
100,000    103.473 
10,000    104.01 
30,000    102.50 
10,000    102.26 
100,000    101.281 
100,000    101.481 
100,000    101.681 
100,000    101.881 
100,000    102.081 
100,000    102.281 
100,000    102.481 
100,000    102.681 
100,000    102.881 
100,000    .103.081 

1,000,000    102.30 
200,000    100.75 
200,000    100.85 
200,000    100.90 
300,000    100.95 
200,000    101.00 
100,000    102.375 
100,000    102.4125 
100,000    102.4525 
100,000    102.525 
100,000    102.535 
200,000    100.50 
200,000    100.75 
100,000    101.00 
100,000    102.39 
100,000    102.49 
200,000    102.59 
200,000    102.69 
200,000    102.79 
200,000    103.00 
100,000    101.50 
100,000    101.75 
100,000    102.00 
100,000    102.50 
100,000    103.00 

100,000    101.00 

1,000,000    102.51 
25,000    103.01 

ted  the  highest 
second  highes 
third  highest  t 
ic  sliding  scal< 

Name  — 
Provost  Bros.  &  Co... 
Kuhn,     Loeb     &     Co., 
Dillon,   Read    &   Co., 
Kidder,     Peabody    & 
Co 

Amount.      Price 
300,000    103.00 

>5,000,000    101.00 
or  none    103.077 
10,000    100.55 
10,000    101.011 
200,000    102.25 

1,000,000    100.50 
100    100.00 
100,000    102.57 
100,000    102.77 
100,000    102.87 
100,000    103.01 
100,000    103.08 
100,000    103.32 
100,000    103.42 
100,000    103.71 
100,000    103.85 
100,000    104.03 
20,000    100.50 
15,000    101.02 
100,000    100.125 
250,000    100.00 

1,000    100.50 
20,000    100.75 
1,000    102.80 
1,000,000    100.00 
50,000    100.00 

3,500,000    100.00 
0,000,000    100.125 
25,000    101.50 

300,000    101.50 
2,000    101.267 
1,000,000    102.51 
100,000    100.50 
100,000    101.00 
100,000    101.50 
100,000    102.00 
100,000    102.50 

E.  Naumburg  &  Co  — 
Austin  J.  G.  Ramsay.. 

All 
Luke  A.  Dalton  
Gordon  B.  Todd  &  Co. 
Italian  Savings  Bank. 
Union     Exchange     Na- 
tional Bank  
Leonhard  Felix  Fuld.. 

Farson,  Son   &  Co  • 

Benjamin    Mordecai    .. 
Harrison   D.    Kerr    
First    National    Bank, 

Remick,  Hodges  &  Co. 
Robinson   &   Co  • 

Chemical   National 
Bank    N    Y      

Mechanics'        Bank, 

Metropolitan  Trust  Co., 
N     Y     

Franklin  Lodge  No.  447, 
F    &  A    M     

John   Guttman    
John  Reid  Agnew  
A.  J.  Johnson  &  Co... 
Garfield    Nat.    Bank... 
Mechanics     &     Metals 
National  Bank 

Fidelity     International 
Trust  Co    .  .         • 

Blake  Brothers  &  Co..' 

R.  W.  Pressprich  &  Co.-j 

First    National    Bank, 
Brooklyn    

Corn   Exchange    Bank.: 
H.  W.  Martin  &  Co... 
Gotham    Nat.     Bank, 

The   Standard    Bank, 

Total  amount 
bid   for    $218,909,100 
Number  of  bids....                 57 

aggregate  bid  ? 
t  bid? 
)id? 
2  offered  by  certain  bidders. 

Bank    for    Savings    in 
th«  City  of  N.  Y.... 
Louis   Masbach    

(a)  What  constitu 
(b)  What  was  the 
(c)  What  was  the 
(d)  Account  for  t 

25.  (a)  Should  a  bond  sales  circular  show  the  total  amount  of  bonds 
authorized  when  only  a  portion  of  the  issue  has  been  purchased 
and  is  being  offered? 

(b)  If  so,  should  the  financial  statement  include  all  the  bonds  author- 
ized, or  only  those  actually  sold  by  the  issuing  community  ? 

(c)  When  bonds  are  purchased  for  delivery  in  installments  and  are 
offered  only  as  delivered,  what  should  the  circular  show? 

(d)  What  should  the  financial  statement  show? 

(e)  Should  the  circular  show  the  bonded  debt  of  co-extensive  or  over- 
lapping political  subdivisions? 

(f)  What  practical  difficulties  intervene  to  prevent  the  stating  of 
much  desirable  information  on  the  circular? 


46  Investment  Problems — Municipal  Bonds 

26.    (a)   To  what  extent  are  municipalities  compelled  to  observe  the  sink- 
ing fund  provisions  which  appear  in  the  bonds? 

(b)  Should  default  in  sinking  fund  payments  be  regarded  as  seriously 
as  default  in  interest  payments? 

(c)  Upon  whom  should  fall  the  responsibility  of  checking  up  the  sink- 
ing fund  payments?  - 


CHAPTER  VII 
CORPORATE  SECURITIES  IN  GENERAL 

1.  What  would  be  the  personal  liability  of  an  investor  which  might  arise 
from  stockholdings  in  the  following  companies  in  the  event  of  finan- 
cial insolvency  on  the  part  of  the  companies : 

(a)  United  States  Steel  Corporation. 

(b)  Pacific  Gas  and  Electric  Co. 

(c)  American  Express  Co. 

(d)  National  Bank  of  Commerce  (N.  Y.) 
(c)   Bank  of  California  (N.  A.) 

2.  M  owns  3,000  shares  out  of  a  total  outstanding  of  3,500  shares  of  the 
Madison  Manufacturing  Company.     In  the  event  of  the  death  of  M, 
what  will  be  the  effect  upon  the  corporate  existence  of  the  company? 

3.  N  has  $100,000  invested  in  the  securities  of  the  General  Electric  Com- 
pany.    An  emergency  arises  and  he  desires  immediately  to  convert 
his  holdings  into  cash.     May  he  do  so  without  difficulty  and  without 
financial  sacrifice? 

4.  What  is  the  "fixed  investment"  of  each  of  the  following  companies : 

(a)  Southern  Pacific  Lines. 

(b)  American  Telephone  and  Telegraph  System. 

(c)  Montana  Power  Co. 

(d)  Bethlehem  Steel  Corporation. 

(e)  Armour  and  Co. 

(f)  Montgomery,  Ward  and  Co. 

(g)  Anaconda  Copper  Co. 

5.  Chart  the  gross  revenues  of  the  following  companies  for  the  period 
from  1910  to  date : 

(a)  New  York  Central. 

(b)  Pacific  Gas  and  Electric. 

(c)  United  States  Steel. 

6.  Compute  the  percentage  of  operating  revenues  absorbed  in  operating 
expenses  for  the  United  States  Steel  Corporation  for  the  years  1910 
to  date. 

7.  Compare  the  investm_eftt_  status  of  the  following  companies  on  the 
basis  of  stability  of  demand  for  product  manufactured  or  service  pro- 
duced : 

*(a)   New  York,  New  Haven  and  Hartford  Railroad. 

(b)  Atchison,  Topeka  and  Santa  Fe  Railroad. 

(c)  Consolidated  Gas  Co.  (N.  Y.) 

(d)  Cities  Service  Co. 

'•   (e)  American  Hide  and  Leather  Co./   - 

(f)  Columbia  Graphophone-f 

(g)  International  Mercantile  Marine/  — 
(h)  Utah  Copper.1^ 

(i)  United  States  Rubber.^  .--. 

48 


50  Investment  Problems — Corporate  Securities 

(j)   Studebaker. 
(k)   Fierce-Arrow. 

8.  Determine  the  relative  percentages  of  stocks  and  bonds  issued  by  the 
following  companies : 

(a)  Southern  Pacific. 

(b)  Union  Pacific. 

(c)  New  York,  New  Haven  and  Hartford. 

(d)  Brooklyn  Rapid  Transit. 

(e)  People's  Gas  (Chicago).  - 

(f)  Laclede  Gas  (St.  Louis). 

(g)  American  Smelting  and  Refining, 
(h)  American  Hide  and  Leather. 

(i)   General  Electric. 

9.  In  1918  Chesapeake  and  Ohio  earned  14.06  per  cent  on  its  common 
stock  after  providing   for  all  charges,   including  interest  on  bonds. 
What  would  have  been  the  percentage  earned  had  the  entire  capitali- 
zation been  stock? 

10.  In  the  period  from  1911  to  1920,  New  Haven  Debenture  4's  of  1955 
declined  from  94%  to  39^.     Account  for  the  decline. 

11.  The  General  Electric  Debenture  6's  of  1940  are  redeemable  at  105  at 
any  interest  date.    What  effect  has  this  upon  the  market  price  of  the 
bonds  ? 

12.  Account  for  the  variance  in  the  yields  on  the  following  Union  Pacific 
securities  as  of  a  certain  date  in  1916: 

Common  stock 5.44% 

Preferred  stock    4.82 

Convertible  4's,  1927 4.70 

First  &  Ref.  4's,  2008 4.40 

First  &  L.  G.  4's,  1947 4.10 


CHAPTER  VIII 
CORPORATION  BONDS  AS  INVESTMENTS 

1.  Prepare  a  list  of  the  various  types  of  bonds  which  have  been  issued 
by  each  of  the  following  companies : 

(a)  Erie  Railroad. 

(b)  Northern  States  Power. 

(c)  Bethlehem  Steel. 

2.  What  is  the  security  behind  each  of  the  following  bonds  ? 

(a)  Hudson  and  Manhattan  First  Lien  Refunding  5's  of  1957. 

(b)  New  York  Connecting  Railroad  First  4y2's  of  1953. 

(c)  Northern  Pacific-Great  Northern  Joint  Convertible  6^'s  of  1936. 

(d)  Associated  Gas  and  Electric  First  5's  of  1939. 

(e)  Bethlehem  Steel  Equipment  Trust  7's  of  1921-1930. 

(f)  American  Cotton  Oil  20-year  5's  of  1931. 

(g)  Baltimore  and  Ohio  First  4's  of  1948. 

(h)   New  Orleans  and  Northeastern  Prior  Lien  5's  of  1940. 

3.  What  is  the  numerical  sequence  of  the  lien  which  secures  the  Erie 
Convertible  4's  of  1953? 

4.  The  Richmond,  Fredericksburg  and  Potomac  Railroad  has  outstand- 
ing "Guaranteed  Mortgage  6  per  cent  and  7  per  cent  stocks."    Should 
the  securities  be  termed  bonds  instead  of  stock? 

5.  The  Northern  Central  Railway  Second  General  5's  of  1926  have  a 
sinking  fund  provision  whereby  $30,000  annually  is  appropriated  to 
buy  bonds  at  par.     No  offerings  were  received  from  1894  to  1920. 
Why? 

6.  Are  the  following  bonds  secured  by  open  or  closed  mortgages : 

(a)  Kansas  City  Terminal  First  4's  of  1960. 

(b)  Adirondack  Electric  Power  First  5's  of  1962. 

(c)  American  Gas  100- Year  6's  of  2016. 

(d)  American  Gas  and  Electric  Debenture  6's  of  2014. 

(e)  Bethlehem  Steel  Purchase  Money  and  Improvement  5's  of  1936. 

7.  Prepare  a  simplified  form  of  income  statement  as  illustrated  below 
to  show  the.  average  results  of  the  past  five  years  for  each  of  these 
companies:  (1)  United  States  Steel;  (2)  General  Electric;  (3)  Penn- 
sylvania Railroad;  (4)  New  York  Central;  (5)  Chicago,  Rock  Island 
and  Pacific. 

Operating   revenues    $1,000,000 

Operating  expenses  700,000 

Operating  income    $300,000 

Other  income    100,000 


Total  income  $400,000 

Fixed  charges   200,000 


Net  income    $200,000 

Dividends  paid    150,000 

Surplus    $50,000 

52 


54  Investment  Problems — Corporation  Bonds 

8.  From  the  table  which  appears  on  page  110,  prepare  a  chart  analysis 
of  the  financial  condition  of  each  of  the  following  companies.    Use 
as  a  base  the  average  gross  revenues  for  the  past  five  years.    In  capi- 
talizing the  net  earnings  of  industrial  companies,  use  10  per  cent  to  25 
per  cent,  according  to  the  nature  of  the  business : 

(a)  American  Agricultural  Chemical. 

(b)  American  Locomotive. 

(c)  American  Woolen. 

(d)  United  States  Rubber. 

(e)  Anaconda  Copper. 

(f)  Consolidated  Gas  (N.  Y.) 

(g)  Montana  Power. 

(h)  Atchison,  Topeka  and  Santa  Fe. 
(i)  Delaware  and  Hudson, 
(j)  Baltimore  and  Ohio. 

9.  The  Imperial  Automobile  Company  has  outstanding  three  bond  issues 
as  follows: 

First  5's    $10,000,000 

Second  6's    5,000,000 

General  6's  5,000,000 

During  the  year  1919  the  operating  revenues  were  $7,000,000  and  the 
operating  ratio  was  80  per  cent.  During  the  year  1920  the  operating 
revenues  were  $6,000,000  and  the  operating  ratio  was  85  per  cent. 

(a)  Determine  the  factor  of  safety  for  each  of  the  bond  issues  dur- 
ing 1919. 

(b)  Determine  the  factor  of  safety  for  each  of  the  bond  issues  during 
1920. 

(c)  Would  it  have  been  more  advisable  in  determining  the  factor  of 
safety  for  the  general  6's  in  1919,  to  have  taken  the  total  interest 
charges  for  all  three  issues  and  to  have  compared  this  amount 
with  the  income  available  to  pay  these  charges,  than  to  take  simply 
the  amount  of  income  available  to  pay  the  interest  on  the  general 
6's  in  comparison  with  the  interest  charge  on  the  single  issue? 

10.  Chart  together  the  Bradstreet  index  of  wholesale  prices  and  the  An- 
nalist average  yield,  of  ten  high-grade  bonds  for  the  period  from  Jan. 
1,  1915,  to  date. 

11.  Bring  the  appended  table — prepared  by  Clark-Dodge  &  Co. — up  to 
date  by  adding  a  column  to  cover  the  current  month. 

QUANTITY  OF  COMMODITIES  EXCHANGEABLE  FOR 
$100  UNION  PACIFIC  1st  4's 

May,  1914  May,  1920  Jan.,  1921 

Unskilled  day  labor  days  55.4  12.6  16.4 

Sugar— Ref.   Gran Ibs.  2,395  350  1,038 

Cotton Ibs.  746  188  512 

Steel  Rails tons  3.46  1.40  1.82 

Steel  sheets Ibs.  5,243  1,400  1,885 

Pig  iron  tons  6.58  1.64  2.36 


56  Investment  Problems — Corporation  Bonds 

May,  1914     May,  1920  Jan.,  1921 

Copper  Ibs.  685  405  656 

Wool— 100  grades  (avge. ) Ibs.  408  114  828 

Wheat    bu.  88^              24  40 

Corn   bu.  121                  34^  86^ 

Live  beef  Ibs.  1,311  664  1,060 

Leather— hemlock  sole Ibs.  323  148  234 

Oil— Ref.  petroleum . .  gal.  746  296  283 

Coal— Nut  anthracite    tons  15^                5.6  5.8 

Newsprint   Ibs.  4,311  700  1,261 

Brick— Common    M.  13.85               3.08  4.55 

Yellow  pine   feet  3,233  700  1,323 

12.  Why  does  a  collateral  trust  bond  often  command  a  higher  price  than 
the  aggregate  of  the  collateral  itself? 

13.  Western  Electric  7's  of   1925  became  converted  into  the  preferred 
stock  of  the  same  company  on  April  1,  1922.     During  the  week  pre- 
ceding April  1,  the  bonds  advanced  in  price  almost  three  full  points. 
Account  for  the  advance. 

14.  If  it  is  assumed  that  two  bonds  are  equally  desirable  as  investments 
in  all  respects  other  than  the  fact  that  one  is  eligible  for  New  York 
savings  banks  investment,  what  will  be  the  difference  in  the  yields 
of  the  securities? 

15.  With  reference  to  the  New  York  and  Erie  First  4's  of  1947: 

(a)  What  is  the  security  behind  the  issue? 

(b)  Why  have  not  the  bonds  a  "legal"  status  ? 

(c)  Why  is  the  yield  on  Fifth  4's  of  1928  practically  the  same  as  on 
the  First  4's  ? 

16.  With  reference  to  convertible  bonds  : 

(a)  Why  did  the  holders  of  $507,000  of  St.  Paul  Consolidated  Deben- 
ture 7's  of  1905  fail  to  convert  into  preferred  stock  prior  to  ma- 
turity in  view  of  the  fact  that  the  conversion  ratio  was  par  for 
par  and  the  preferred  stock  was  quoted  around  170? 

(b)  The  Brooklyn  Rapid  Transit  4's  of  2002  were  convertible  at  par 
into  common  stock  up  to  July  1,  1914.    Should  the  holder  of  any 
of  these  bonds  have  converted?    What  effect  did  the  termination 
of   the  conversion   period   have  upon   the   market  price  of   the 
bonds  ? 

(c)  Western  Electric  7's  of  1925  are  convertible  into  7  per  cent  pre- 
ferred stock  at  par  from  April  2,  1922,  to  Oct.  1,  1924.    Under 
what  circumstances  will  a  holder  elect  to  convert  ?    Will  the  mar- 
ket price  of  the  bonds  after  Oct.  1,  1924,  differ  materially  from 
that  prior  to  that  date? 

17.  Are  all  bonds  of  the  same  issue  uniformly  secured  under  the  mortgage 
indenture  ? 

18.  How  may  the  holders  of  debenture  bonds  be  assured  against  future 
issues  with  superior  liens? 


58  Investment  Problems — Corporation  Bonds 

19.  (a)   Is  there  any  limit  upon  the  amount  of  bonds  which  may  be  issued 

under  the  mortgage  securing  the  New  York  Central  Refunding 
and  Improvement  bonds  due  2013? 
(b)   For  what  purposes  may  additional  bonds  be  issued? 

20.  (a)  In  what  various  ways  may  bonds  be  issued  under  an  identical 

mortgage  with  different  maturity  dates? 

(b)  When  maturity  dates  differ,  how  are  the  interests  of  the  re- 
maining bondholders  protected? 

21.  (a)   Distinguish  between  bonds  issued  in  series  and  bonds  with  serial 

maturities. 

(b)   In  which  class  belong  the  Pennsylvania  Railroad  General  Mort- 
gage bonds? 

22.  The  Montana  Power  Co.  in  1914  sold  some  of  its  First  5's  at  94. 
A  second  lot  of  these  bonds  was  offered  in  1918  at  89.     Could  the 
original  purchasers  object? 

23.  The  Adams  Express  Collateral  Trust  4's  of  1948  were  outstanding 
to  the  total  amount  of  $7,291,500  on  August  20,  1921.    The  collateral 
securities  as  of  that  date  are  appended : 

Par  Value 

Alabama  Great  Southern  1st  5's,  1927 $84,000 

Atlantic  City  R.  R.  Co.  1st  Cons.  4's,  1951 265,000 

Atchison,  Topeka  &  Santa  Fe  Trans.  1st  4's,  1958. . .  200,000 

Atlantic  Coast  Line  L.  &  N.  Coll.  4's,  1952 200,000 

Baltimore  &  Ohio-P.,  L.  E.  &  W.  Va.  Ref .  4's,  1941 .  408,000 

Big  Sandy  Ry.  1st  4's  (C.  &  O.),  1944 741,000 

Birmingham  Terminal  Co.  1st  50-year  4's,  1957 150,000 

Boonville  R.  R.  Bridge  1st  4's,  1951 12,000 

Brooklyn  Union  Elevated  4-5,  1st  5's,  1950 10,000 

Chesapeake  &  Ohio  Ry.  Gen.  4^'s,  1992 260,000 

Chesapeake  &  Ohio-Craig  Valley  1st  5's,  1940 31,000 

Chicago  &  Eastern  Illinois  Ref.  &  Imp.  4's,  1955 100,000 

Chicago,  Rock  Island  &  Pacific  1st  &  Ref.  4's,  1934. .  100,000 

Chicago  &  Western  Indiana  Cons.  4's,  1952 100,000 

Cleveland  Term.  &  Valley  1st  4's,  1995 100,000 

Erie  R.  R.  Gen.  Lien  4's,  1996 375,000 

Erie  R.  R.  Prior  Lien  4's,  1996 90,000 

Erie  R.  R.-Pennsylvania  Coll.  4's,  1951 100,000 

Hocking  Valley  1st  Cons.  4^'s,   1999 100,000 

Iowa  Central  1st  and  Ref.  4's,  1951 100,000 

Lake  Shore  &  Michigan  Southern  25-year  4's,  1931.  .  1,352,000 

Long  Island  (North  Shore  Br.)  1st  Cons.  5's,  1932..  100,000 

Louisville  &  Jeff.  Bridge  1st  4's,  1945 25,000 

Louisville  &  Nashville  Unified  4's,  1940 100,000 

Louisville  &  Nashville-Southern  R.  R.  4's,  1952 200,000 

Michigan  Central  R.  R.  20-year  Deb.  4's,  1929 120,000 

Minn.  &  St.  Louis  1st  Ref.  4's,  1949 150,000 

New  York  Bay  Exten.  1st  5's,  1943 100,000 

New  York,  Chicago  &  St.  Louis  Deb.  4's,  1931 300,000 

N.  Y.,  Susquehanna  &  West'n  1st  Ref.  5's,  1937..  100,000 


60  Investment  Problems — Corporation  Bonds 

Par  Value 

New  Orleans  Terminal  1st  4's,  1953,  Series  "A" 615,000 

Norfolk  &  Western  Div.  1st  L.  &  G.,  4's,  1944 100,000 

Norfolk  &  Western  1st  Cons.  4's,  1996 411,000 

Philadelphia,  Baltimore  &  Washington  1st  4's,  1943.  200,000 

Providence  Securities  Co.  50-year  Deb.  4's,  1957 100,000 

Reading-Jersey  Central  Coll.  4's,  1951 232,000 

Rio  Grande  West.  Cons.  4's,  1949,  Sub-Ser.  "A" 100,000 

Southern  Ry.-East  Tenn.  Reorg.  Lien  5's,  1938 98,000 

Southern  Ry.-St.  Louis  Div.  1st  4's,  1951 25,000 

Southern  Ry.  1st  Cons.  5s,  1994 5,000 

Terminal  Assoc.  of  St.  Louis  Gen.  Ref.  4's,  1953 100,000 

Toledo  &  Ohio  Central  Gen.  5's,  1935 50,000 

Union  Depot  of  Columbus  50-year  S.  F.  7's,  1923 13,000 

Union  Depot  at  Columbus  Gen.  4^'s,  1946 130,000 

Washington  Terminal  1st  3^'s,  1945 200,000 

Western  New  York  &  Pennsylvania  Gen.  4's,  1943..  115,000 

Wheeling  &  Lake  Erie  Ref.  4^'s,   1966 100,000 

(a)  What  is  the  present  value  of  the  collateral  ? 

(b)  Does  the  fact  that  the  company  is  an  unincorporated  association 
affect  the  position  of  the  noteholders  ? 


CHAPTER  IX 
STOCK  AS  AN  INVESTMENT 

1.  What  has  been  the  dividend  record  of  the  following  companies: 

(a)  Pennsylvania  Railroad. 

(b)  Illinois  Central. 

(c)  Delaware  and  Hudson. 

(d)  Chicago,  Milwaukee  and  St.  Paul. 
(c)  -Erie. 

(f )  Consolidated  Gas  Co.  (N.  Y.) 

(g)  United  Gas  Improvement  Co. 
(h)  Interborough  Rapid  Transit  Co. 

(i)   American  Telephone  and  Telegraph. 

(j)    Diamond  Match  Co. 

(k)  General  Electric  Co. 

(1)  United  States  Steel  Corp. 

(m)  American  Sugar  Refining  Co. 

2.  How  many  times  has  the  preferred  dividend  requirement  been  earned 
during  each  of  the  past  ten  years  by  each  of  the  following  companies : 

(a)  United  States  Steel. 

(b)  United  States  Rubber. 

(c)  Bethlehem  Steel. 

(d)  American  Locomotive. 

(e)  National  Lead. 

(f)  Pressed  Steel  Car. 

3.  Why  is  the  payment  of  dividends  out  of  surplus  when  current  earn- 
ings   are    insufficient    regarded    in    some    circles    as    unsatisfactory 
practice  ? 

4.  Compute  the  current  yields  on  the  guaranteed  stocks  shown  in  the 
table  on  page  114. 

5.  In  what  respects  does  the  stock  of  the  Albany  and  Susquehanna  on 
which  dividends  at  the  rate  of  8  per  cent  per  annum  are  guaranteed 
by  Delaware  and  Hudson,  offer  investment  advantages  over  the  bonds 
directly  issued  by  Delaware  and  Hudson? 

6.  The  initial  dividend  on  the  common  stock  of  Allis-Chalmers  was 
paid  in  August  of  1920.   Why  was  it  impossible  to  pay  dividends  on 
this  stock  previously? 

7.  Compare,  on  the  basis  of  investment  desirability,  the  stocks  of  the 
Bethlehem  Steel  Corporation. 

8.-  From  the  most  recent  income  statement  available,  show  the  order  in 
which  the  various  securities  of  a  representative  company,  such  as 
Delaware  and  Hudson,  participate -in  the  distribution  of  earnings. 
Determine  the  factor  of  safety  for  each  issue. 

9.  Determine  the  'book  value  of  a  share  of  common  stock  in  each  of  the 
following  companies  before  and  after  deducting  intangible  assets: 

(a)  Cluett,  Peabody  and  Co. 

(b)  United  States  Steel  Corp. 

(c)  United  States  Rubber  Co. 

62 


64  Investment  Problems — Stocks 

(d)  General  Electric  Co. 

(e)  American  Cotton  Oil  Co. 

(f)  American  Tobacco  Co. 

(g)  Coca-Cola  Co. 

10.  What  is  the  valuation  placed  upon  "goodwill"  in  the  balance  sheets 
of  the  following  companies: 

(a)  United  States  Steel  Corp. 

(b)  American  Woolen  Co. 

(c)  General  Electric  Co. 

(d)  Cluett-Peabody  and  Co. 

(e)  American  Cotton  Oil  Co. 

(f)  Coca-Cola  Co. 

(g)  American  Tobacco  Co. 
(h)  F.  W.  Woolworth  Co. 
( i)  Eastman  Kodak  Co. 

11.  (a)  What  effect  has  book  value  upon  the  market  price  of  a  security? 
(b)  Has  book  value  equal  significance  in  the  case  of  (1)  railroads; 

(2)  public  utilities;  (3)  industrials;  (4)  bank  stocks? 

12.  (a)   In  what  important  respects  does  an  investment  in  bank  stocks 

differ  from  the  usual  stock  commitment  ? 

(b)  In  March  of  1922,  20  shares  of  Guaranty  Trust  Co.  (N.  Y.) 
stock  were  sold  at  202;  the  last  preceding  sale  at  auction  was 
at  318  in  February  of  1921.  Account  for  the  change  in  price. 

13.  Compare  the  average  current  yields  on  the  preferred  and  common 
stocks  of  the  following  companies:  United  States  Steel;  American 
Locomotive;  National  Biscuit;  National  Lead;  American  Woolen. 

14.  Compare  the  book  value  of  a  share  of  Goodyear  Tire  and  Rubber 
common  stock  with  its  proportionate  equity  in  the  assets  based  upon 
the  current  market  value  of  the  underlying  issues. 

15.  Recently  the  common  stockholders  of  the  Standard  Oil  Company  of 
New  Jersey  were  given  the  right  to  subscribe  to  new  preferred  stock 
to  the  extent  of  100  per  cent  of  their  'holdings.    These  rights  were 
quoted  in  the  open  market  originally  at  about  17.    What  were  the 
various  ways  in  which  a  stockholder  might  "cash  his  privilege"  ? 

16.  (a)  What  is  the  so-called  New  England  school  of  corporate  financing? 
(b)   W'hy  are  the  companies  of  this  type  better  able  to  withstand 

periods  of  depression? 

17.  When  the  common  stockholders  of  the  Chicago,  Milwaukee  and  St. 
Paul  recently  decided  to  make  the  Puget  Sound  extension,  was  the 
position  of  the  preferred  stockholders  affected  ? 

18.  Prior  to  the  San  Francisco  disaster,  the  Hartford  Fire  Insurance  Co. 
balance   sheet   showed   capital    stock   at   $1,250,000   and   surplus   at 
$5,000,000.  The  loss  arising  out  of  the  disaster  was  about  $7,000,000. 
Outline  the  manner  in  which  insolvency  was  avoided  by  an  increase 
in  the  capitalization  of  the  company. 

19.  What  are  the  rights  and  the  obligations  of  a  stockholder? 

20.  In  April  of  1922,  the  common  stock  of  Union  Sulphur  Co.  was  quoted 
at  about  $75,000  a  share;  and  the  common  stock  of  the  Cuba  Co.  at 
about  $80,000  a  share.   Account  for  these  prices. 


CHAPTER  X 
RAILROAD  SECURITIES 

(a)  What  is  the  ratio  between  stocks  and  bonds  outstanding  of  the 
combined  American  railroads  ? 

(b)  What   effect   has   this   upon   the   investment   status   of   the   se- 
curities?    H*~~-  >^ 


(c)  Why  have  railroad  companies  found  it  harder  to  sell  stock  than 
bonds  during  recent  years? 

(d)  In  what  manner  have  Pennsylvania  and  Atchison  been  able  to 
increase  their  stock  issues  ?  +3L+Jj&*-~\ 

2.  What  are  the  functions  of  the  Irrter-State  Commerce  Commission? 

3.  What  are  the  principal   railroad  systems  in  each  of  the   following 
geographical  sections:  New"  England;  North  Atlantic;  Southeastern; 
Central ;  Southwestern ;  Mountain-Pacific. 

4.  \Vhat  information  of  investment  analysis  value  may  be  secured  from 
the  annual  stockholder's  report  ? 

5.  How  does  geographical  location  affect  each  of  the  following  roads : 
New  Haven ;  New  York  Central ;  Pennsylvania ;  Southern ;  Burling- 
ton ;    Northern    Pacific ;    Southern    Pacific ;    Missouri,    Kansas,    and 

Texas ;  Western  Pacific. 

\*  **+•** 'Y 

6.  (a)   What  are  the  five  sources  of  operating  revenues? 

(b)  What  are  the   relative   percentages  of   each   for   New   Haven ; 
Pennsylvania;  Atchison?  )  ^ut/^    \r*+&~<* 

(c)  How  are  railroad  rates  determined? 

(d)  Are  railroads  permitted  to  compete  on  the  basis  of  rates  ? 

(e)  What  are  the  principal  classes  of  commodities  carried? 

(f)  Which  classes  afford  the  greater  profits? 

(g)  What  are  the  advantages  of  diversified  commodities? 
(h)   How  is  traffic  volume  measured? 

(i)   What  effect  has  distance  carried,  upon  operating  income? 
(j)  W'hat  effect  have  rate  increases  and  decreases  upon  traffic? 
(k)   What  effect  has  transportation  cost  upon  commodity  prices? 

7.  (a)  What  are  the  five  divisions  of  operating  expenses  ? 

'  (b)  What  were  the  relative  percentages  of  each,  based  upon  operat- 
ing revenues,  for  the  combined  roads  for  the  years  1915,  1916 
and  1917? 

(c)  W7hat  is  meant  by  "skimping  maintenance"?    How  is  it  accom- 
plished? What  is  the  purpose? 

(d)  What  are  the  advantages  and  limitations  in  the  use  of  operating 
ratio  as  an  investment  criterion  ? 

(e)  \Vhy  is  "expense  per  train  mile"  a  fairer  criterion? 

(f)  In  1917  Rock  Island  expended  12.12  per  cent  of  operating  rev- 
enues in  maintenance  of  way  and  structure  against  10.62  per  cent 

66 


68  Investment  Problems — Railroad  Securities 

for  Burlington.  How  may  it  be  shown  that  Burlington  really 
made  a  better  showing  than  Rock  Island  in  this  respect? 

(g)  Is  there  any  relationship  between  the  amounts  expended  for 
maintenance  of  equipment  and  hire  of  equipment? 

(h)  What  is  the  importance  of  adequately  providing  for  maintenance 
of  equipment? 

(i)  What  are  the  two  principal  costs  included  in  transportation 
charges?  Over  which  has  the  road  least  control? 

(j)  Trace  the  changes  in  percentages  of  revenues  absorbed  in  trans- 
portation expense  for  any  large  road  during  the  past  ten  years. 

8.  (a)  What  are  the  sources  of  non-operating  income  ? 
(b)   In  what  roads  is  this  income  of  large  importance  ? 

9.  Arrange   in   the  order   of   priority   of    claim   the    following   charges 
against  operating  revenues : 

(a)  Rent  of  leased  lines. 

(b)  Taxes. 

(c)  Dividends. 

(d)  Wages  and  salaries. 

(e)  Depreciation. 

(f)  Interest  on  bonds. 

(g)  Dividends  on  guaranteed  stocks, 
(h)  Interest  on  guaranteed  bonds, 
(i)  Hire  of  equipment. 

(j)   Materials  purchased. 

10.  Compare  the  dividend  policy  of  the  New  Haven  prior  to  1910  with 
that  of  the  Pennsylvania. 

11.  Compare  the  cash  position  of  the  following  companies: 

December  31,  1920  Erie  Railroad  Columbia  Graphophone 

Current  assets   $47,131,531  $34,914,272 

Current  liabilities   ...  44,141,132  16,378,195 


Net  working  capital.  $2,990,309  $18,536,077 

12.  What  was  the  "test  period"  used  as  a  basis  for  guaranteed  earnings 
during  the  Federal  operation  from  1918  to  1920? 

13.  Show  by  diagram  how  the  noteholder's  equity  increases  during  the 
life  of  equipment  trusts. 

14.  (a)   What  is  the  Philadelphia  plan  for  the  purchase  of  railroad  equip- 

ment and  why  is  it  so  called  ? 

(b)  Is  the  Philadelphia  plan  superior  to  the  ordinary  equipment  mort- 
gage? 

(c)  May  equipment  notes  be  issued  up  to  100  per  cent  of  the  value 
of  the  equipment? 

(d)  Should  the  maturity  exceed  ten  years? 

(e)  May  redemption  be  with  sinking  fund  rather  than  serial? 

(f)  Does  the  equipment  manufacturer  ever  guarantee  the  notes? 

(g)  Show  by  diagram  the  manner  in  which  the  New  York  Central 
Lines  Equipment  Trust  4^'s  of  1912-1927  are  secured. 


70  Investment  Problems — Railroad  Securities 

(h)   How  have  equipment  notes  fared  in  reorganizations? 

(i)   In  1920  Erie  Equipments  were  selling  to  yield  about  8  per  cent, 

whereas  Union  Pacific  Equipments  were  yielding  less  than  7  per 

cent.    Account  for  the  difference  in  yields. 

15.  Certain  equipment  notes  which  were  delivered  to  the  Government  by 
the  roads  following  the  termination  of  Federal  control  in  payment  of 
equipment  purchased  by  the  Government,  were  sold  to  investors  in 
1921  under  an  agreement  whereby  33 J  per  cent  of  the  notes  of  each 
issue  were  retained  by  the  Government  and  stampd  subordinate  to 
those  sold.    Why  was  this  done? 

16.  Prepare  seasonal  variation  index  numbers  for  railroad  net  earnings  on 
a  monthly  basis  which  will  enable  the  annual  net  earnings  to  be  esti- 
mated from  those  of  any  single  month. 

17.  How  may  the  trend  of  railroad  earnings  be  predetermined  to  a  certain 
extent  from  statistics  of  idle  cars  and  car  loadings? 

18.  Refer  to  page  1740  of  the  Commercial  and  Financial  Chronicle  of 
October  22,  1921,  and  set  up  in  parallel  columns  for  the  years  1915 
and  1920  the  principal  items  in  operating  revenues  and  operating  ex- 
penses, with  respective  percentages. 

19.  Prepare  "pie"  charts  to  show  the  distribution  of  each  dollar  of  revenue 
received  by  the  railroads  in  1915  and  1920. 

20.  Compare  New  York  Central  and  Pennsylvania;  B.  &  O.  and  C.  &  O. ; 
Seaboard  Air  Line  and  Atlantic  Coast  Line;  St.  Paul  and  Northern 
Pacific ;  Atchison  and  Southern  Pacific ;  Missouri  Pacific  and  'Frisco ; 
for  the  years  1915  and  1920  as  to : 

(a)  Gross  operating  revenue  per  mile  operated. 

(b)  Commodities  carried. 

(c)  Distance  carried. 

(d)  Traffic  volume. 

(e)  Car  loading. 

(f)  Revenue  per  train  mile. 

(g)  Operating  ratio. 

(h)  Expenses  per  train  mile. 

(i)  Hire  of  equipment, 

(j)  Non-operating  income, 

(k)  Fixed  charges. 

(1)  Dividends  earned  and  paid, 

(m)  Capitalization  per  mile. 

21.  (a)  What  has  been  the  new  mileage  added  annually  by  the  railroads 

of  the  United  States  since  1900? 

(b)  What  is  the  annual  requirement  for  replacement  of  equipment? 

(c)  What  was  the  total  number  of  each  class  of  equipment  held  by 
the  combined  roads  as  of  Dec.  31  past? 

(d)  Why  is  a  surplus  of  at  least  300,000  freight  cars  a  normal  con- 
dition in  May  of  each  year? 

22.  What  is  the  comparison  between  the  capitalization  and  the  physical 
valuation  as  set  by  the  Government  under  the  Act  of  March  1,  1913, 


72  Investment  Problems — Railroad  Securities 

on  the  following  roads:   Rock  Island;  Central  of  Georgia;  Kansas 
City  Southern ;  Western  Pacific  ? 

23.  What  railroads  with  a  mileage  exceeding  1,000  are  currently  in  re- 
ceivership ? 

24.  Compare  the  relative  amounts  of  bonds  and  stocks  outstanding  for  the 
New  Haven  system  as  of  1899  and  1922. 

25.  Select  one  of  the  large  railroad  systems  and  determine  the  average 
yield  which  may  be  obtained  from  (1)  the  senior  bond  issues;  (2)  the 
junior  bond  issues;  and  (3)  the  equipment  note  issues. 

26.  The  interest  rate  on  the  Southern  Railway  Development  and  General 
Mortgage  bonds  due  in  1956  cannot,  under  the  terms  of  the  mort- 
gage exceed  4  per  cent.     In  January,   1922,  $30,000,000  were  sold 
bearing  an  interest  rate  of  6^2  per  cent.    To  what  extent  is  the  pay- 
ment of  the  additional  2^  per  cent  assured  ? 

27.  What  is  the  investment  position  of  the  Richmond  and  Petersburg- 
Consolidated  4y2's  of  1940? 

28.  Account  for  the  fact  that  in  the  spring  of  1916  the  yields  on  the  bonds 
of  the  subsidiary  companies  of  the  Southern  Pacific  system,  prac- 
tically all  of  which  were  uniformly  guaranteed,  varied  from  4.30  to 
7.40  per  cent. 

29.  Why  do  the  Boston  Terminal   3^'s  of   1947,  guaranteed  by  New 
Haven  and  Boston  and  Albany,  sell  to  yield  about  1  per  cent  less  than 
the  general  credit  of  either  guaranteeing  road? 

30.  With  reference  to  the  Transportation  Act  of  1920: 

(a)  If  Lackawanna  and  Erie  should  desire  to  consolidate,  would  it 
be  permissible? 

(b)  What  method  of  payment  was  decided  upon  for  the  equipment 
purchased  by  the  Government  and  turned  over  to  the  roads? 

(c)  What  was  the  purpose  of  the  revolving  fund? 

(d)  Earnings  in  excess  of  the  fair  return  are  to  be  divided  in  what 
manner  ? 

(e)  What  is  the  basis  for  rate-making? 

(f )  What  rate  districts  were  established  by  the  Inter-State  Commerce 
Commission  ? 

(g)  What  was  the  valuation  set  upon  the  total  railroad  property  by 
the  I.  C.  C.  and  how  did  this  valuation  compare  with  the  total  book 
values  ? 

(h)   For  what  period  was  Sy2  per  cent  set  as  a  fair  rate  of  return? 

31.  Writh  reference  to  the  1921  report  of  the  Canadian  Pacific  Railway 
Co.: 

(a)  Is  the  payment  on  the  Consolidated  4  per  cent  Debenture  stock 
a  fixed  or  a  contingent  charge? 

(b)  Was  the  operating  income  sufficient  to  pay  the  dividends  on  the 
Preference  and  Ordinary  stocks? 

(c)  What  were  the  relative  amounts  of  operating  and  non-operating 
income  ? 

(d)  What  were  the  sources  of  non-operating  income? 


CHAPTER  XI 
PUBLIC  UTILITY  SECURITIES 

1.  (a)   What  are  the  general   functions  of  a  State  public  utility  com- 

mission? 

(b)  For  what  purposes  will  a  commission  approve  the  issuance  of 
securities?    • '  •••   ,'/"/".;.' 

(c)  Why  do  commissions  act  more  conservatively  in  approving  bond 
issues  than  in  approving  stock  issues? 

(d)  Why  have  the  commissions  in  the  various  States  been  reluctant 
to  grant  rate  increases  during  recent  years,  although  the  increases 
were  apparently  justified  by  higher  operating  costs?     To  what 
extent  have  increased  rates  been  granted  ? 

2.  (a)   Why  has  the  holding  company  become  so  predominant  in  the 

public  utility  field? 

(b)  Distinguish  between  the  functions  performed  respectively  by  the 
following  holding  companies : 

(1)  Electric  Bond  and  Share  Co. 

(2)  Public  Service  Corporation  of  N.  J. 

(3)  Cities  Service  Co. 

(4)  Electric  Securities  Co.- 

(c)  Why  are  the  securities  issued  by  holding  companies  mostly  of 
the  collateral  type? 

3.  Discuss    from   the   standpoint  of  a   stockholder,  the   issuance  of  the 
Interborough-Metropolitan   (N.  Y.)    Collateral  Trust  4y2's  of   1956 
which  were  exchanged   for  the  common  stock  of  the  Interborough 
Rapid  Transit  Co.  in  1906. 

4.  Revise  the  table  on  page  169  to  cover  operations  for  last  year  rather 
than  for  1918  as  shown. 

5.  Why  do  certain  States,  notably  New  York  and  Pennsylvania,  prohibit 
savings  banks  from  investing  in  public  utility  securities? 

6.  Chart  the  intercorporate  relationship  of  the  various  companies  com- 
prising the  Interborough  system  in  New  York  City. 

7.  What  are  the  principal  difficulties  which  confront  utility  companies, 
and  how  do  the  respective  classes  rank  with  regard  to  these  difficulties  ? 

8.  Do  the  securities  of  each  of  the  following  companies  meet  the  re- 
quirements for  a  good  utility  investment  as  stated  on  page  169? 

(a)  Cities  Service  Co. 

(b)  North  American  Co. 

(c)  Interborough  Consolidated  Co.  (N.  Y.) 

(d)  Consolidated  Gas  Co.  (N.  Y.) 
C?)  Pacific  Gas  and  Electric  Co. 

1  i)  Detroit  Edison  Co. 
(g-)   Montana  Power  Co. 

74 


76  Investment  Problems — Public  Utility  Securities 

9.  What  was  the  total  depreciation  during  the  period  from  1912  to  1921 
in  the  market  value  of  the  following  securities  of  the  transit  com- 
panies in  New  York  City? 

(a)  Interborough  Consolidated : 

Common. 

Preferred. 

Int.-Met.  Collateral  Trust  4^'s  of  1956. 

(b)  Interborough  Rapid  Transit  Co. : 

First  and  Refunding  5's  of  1966. 

(c)  Manhattan  Elevated : 

Common. 

Consolidated  4's  of  1990. 

(d)  New  York  Railways  : 

Common. 

Refunding  4's  of  1942. 

Adjustment  5's  of  1942. 

10.  In  February  of  1922  a  member  of  the  Transit  Commission  in  New 
York  City  made  the  statement  that  each  day  4,000  more  people  rode 
on  the  transit  lines  of  the  city  than  on  the  day  before.    Is  this  state- 
ment evidenced  by  the  following  statistics  of  passengers  carried  on 
all  lines? 

1919  2.079,944,297 

1920  2,365,587,369 

1921  2,491,909,178 

11.  How  did  the  Series  Mortgage  help  the  utility  companies  secure  new 
capital  in  1921  ? 

12.  What  effect  'has  the  enactment  of  the  Federal  Water  Power  Bill  had 
upon  hydro-electric  enterprises? 

13.  What  is  the  "superpower"  plan  as  contemplated  for  the  North  At- 
lantic States  ? 

14.  (a)  What  are  the  various  methods  of  valuing  public  utility  property? 

(b)  Which  method  has  been  approved  by  the  Public  Utility  Com- 
mittee of  the  Investment  Bankers'  Association  ? 

(c)  Which  method  was  followed  by  the  Transit  Commission  in  valu- 
ing the  traction  lines  in  New  York  City  in  1921  ? 

15.  What  is  the  current  yield  on  the  following  securities  of  the  Public 
Service  Corporation  of  New  Jersey? 

(a)  General  5's  of  1959. 

(b)  Secured  7's  of  1941. 

(c)  Perpetual  6's. 

(d)  Preferred  stock. 

(e)  Common  stock. 

16.  What  is  the  security  behind  the  Fifth  Series  Collateral  Trust  5's  of 
the  Railway  and  Light  Securities  Co.  of  Boston? 

17.  What  are  the  "Bonbright"  five  arguments  in  favor  of  public  utility 
securities  ? 


78  Investment  Problems — Public  Utility  Securities 

18.  Recently  the  Central  Light  and  Power  Co.  of  Pennsylvania  sold  pre- 
ferred no  par  stock  which  was  to  receive  dividends  at  the  rate  of 
$3.20  for  the  first  year,  $3.60  for  the  second  year,  $4.00  for  the  third 
year  and  thereafter.    Why  was  this  dividend  arrangement  adopted? 
What  other  large  utility  company  followed  the  same  practice?   Why 
has  the  redemption  value  on  this  stock  been  placed  at  $70  per  share  ? 

19.  Why  has  a  public  utility  company  which  supplies  a  product  an  in- 
herent superiority  over  one  which  supplies  a  service? 

20.  Analyze  the  investment  position  of  the  14.th  series  of  Collateral  Trust 
bonds  of  the  Electric  Securities  Co.  at  the  date  of  issue  in  1916. 

21.  During  February  of  1922  the  common  stock  of  Manhattan  Elevated 
dropped  from  49^  to  41.   Account  for  the  decline. 

22.  With  reference  to  the  surface  trolley  lines  in  the  city  of  Chicago : 

(a)  What  companies  are  operating  and  what  is  the  plan  of  operation  ? 

(b)  What  is  meant  by  "residue  receipts"  ? 

(c)  How  are  the  residue  receipts  divided  ? 

(d)  What  is  included  in  "joint  account"  expenses  ? 

(e)  To  what  extent  does  the  city  of  Chicago  share  in  the  earnings  ? 

(f)  What  is  the  present  rate  of  fare? 

(g)  To  what  extent  are  the  operating  companies  insured  a  satisfac- 
tory return  upon  invested  capital? 


CHAPTER  XII 
INDUSTRIAL  SECURITIES 

1.  If  the  average  1916  net  income  is  assumed  to  be  100,  the  average 
1919  net  income  of  selected  industries  in  the  enumerated  lines  was 
as  follows:    Textiles,  265;  Rubber,  203;  Iron  and  steel,  45;  Cop- 
per, 15.  Account  for  the  variations. 

2.  (a)   Why  do  certain  industrial  companies  refuse  to  publish  financial 

statements  ? 

(b)  What   financial    information   must   be   published   by   companies 
which  desire  security  listing  on  the  New  York  Stock  Exchange  ? 

(c)  Why  is  it  desirable  that  industrial  companies  state  gross  sales  as 
well  as  net  sales  in  their  published  income  accounts  ? 

(d)  How  often  does  each  of  the  following  companies  publish  an  in- 
come statement:  United  States -Rubber;  General  Motors;  United 
States  Steel  ? 

3.  May  any  of  the   following  companies  be   regarded  as   monopolies : 
Ford  Motor;  Cluett-Peabody ;  American  Woolen;  Eastman  Kodak; 
Coca-Cola ;  Puljrgan ;  American  Tobacco  ? 

4.  To  what  extent  do  the  following  companies  have  control  over  the 
sources  of  raw  material  used  in  the  manufacture  of  their  products: 
American   Hide  and   Leather;   United   States   Steel;   United   States 
Rubber;  International  Paper? 

5.  To  what  extent  have  the  following  companies  control  over  the  manu- 
facture of  the  raw  material  and  partly  finished  goods  they  produce : 
Anaconda  Copper ;  American  Beet  Sugar ;  Standard  Oil  ? 

6.  To  what  extent  are  the  earnings  of  the  following  companies  affected 
by   the   nature   of   their   products :   American    Locomotive ;    Central 
Leather ;   Studebaker ;   Utah   Copper ;   F.   W.   Woolworth ;   Armour 
and  Co.? 

7.  Which  of  the  following  companies  would  be  adversely  affected  by 
the  enactment   of   low   import   duties :   American   Woolen ;   General 
Electric ;  International  Harvester ;  International  Mercantile  Marine ; 
American  Beet  Sugar;  B.  F.  Goodrich  Co.? 

8.  Bring   up   to    date   the   table   on   page    187   and   add   any   industrial 
preferred   stocks   which   have  an  unbroken   dividend    record   for   at 
least  12  years. 

9.  (a)   In  what  important  respect  should  dividends  received  upon  mining 

stock  be   regarded  differently   from  those   received   from   other 
stocks  ? 

(b)  If  Utah  Copper  is  purchased  to  yield  12  per  cent,  how  long  will 
it  take  for  the  holder  to  receive  the  return  of  his  principal 
and  meantime  receive  a  yield  of  7  per  cent  on  the  commitment, 
assuming  that  the  dividend  rate  is  unchanged  and  the  annual 
installments  on  account  of  principal  are  reinvested  at  4  per  cent  ? 

80 


82  Investment  Problems — Industrial  Securities 

(c)  What  effect  has  each  of  the  following  operating  conditions  upon 
the  prosperity  of  mining  companies  :  geographical  location  ;  trans- 
portation facilities  ;  climatic  conditions ;  labor ;  topography  ? 

(d)  Which  are  the  "porphyry"  mines  and  why  are  they  so  called  ? 

(e)  How  are  the  ore  reserves  of  a  mine  determined? 

10.  W'hy  did  Anaconda  Copper  acquire  the  American  Brass  Co.  in  1921  ? 

11.  What  was  the  range  in  the  prices  of  Alaska  Gold  Mines  stock  be- 
tween 1915  and  1921?   Account  for  the  movement. 

12.  The  market  value  of  the  securities  of  23  representative  oil  companies 
in  1919  was  $7,198,000,000.   The  same  securities  in  1922  were  valued 
at  $4,767,000,000.   Account  for  the  decline. 

13.  The  stadium  at  the  University  of  Washington  was  built  by  the  Asso- 
ciated Students  of  University  of  Washington  at  a  cost  of  about  $500,- 
000.    A  bond  issue  of  $250,000  was  offered.    What  was  the  invest- 
ment status  of  the  bonds? 

14.  (a)   How  did  the  closing  of  the  copper  mines  in  1921  improve  the 

position  of  the  silver  mining  companies  ? 

(b)  How  did  the  operation  of  the  Pittman  Act  help  the  silver  mining 
companies  ? 

(c)  What  is  the  principal  market  for  silver  ? 

15.  Analyze  the  investment  position  of  the  Copper  Export  Association 
8  per  cent  notes  due  1922-1925. 

16.  Analyze  the  following  statement  and  determine  whether  or  not  the 
company  made  a  profit  for  the  period : 

K  CLUETT,  PEABODY  &  CO.— 1920 

Total  receipts    $32,817,628 

Expenses  and  interest 30,596,532  » 


Balance    $2,221,096 

Depreciation     282,804  • 


Net  profit   $1,938,292  w 

Dividends    __-- 2,0^,070  ' 


Deficit    $75,778 

Previous    surplus    8,840,368 


Net  surplus    $8,764,590 


Commitment  reserve  $637,758 1  '" 

Inventory  depreciation   ....     2,356,060-5  : 


Adjusted  surplus    $5,770,772 

17.    (a)   What  conclusions  were  reached  by  L.  P.  Ayres  of  the  Cleveland 

Trust  Co.  in  his  review  of  the  automobile  industry  in  1921  ? 
(b)   On  the  basis  of  Mr.  Ayres'  conclusions,  what  motor  stocks  offer 
the  best  opportunities  at  the  present  time  ? 


84     •  Investment  Problems — Industrial  Securities 

18.  What  is  the  current  yield  on  the  following  industrial  bonds? 

(a)  U.  S.  Steel  S.  F.  5's  of  1963. 

(b)  Indiana  Steel  1st  5's  of  1952. 

(c)  Armour  and  Co.  1st  4^'s  of  1939. 

(d)  Amer.  Smelt,  and  Ref.  1st  A  5's  of  1947. 

(e)  U.  S.  Rubber  1st  and  Ref.  5's  of  1947. 
(.£)  Westinghouse  Electric  7's  of  1925. 

19.  What  is  the  investment  position  of  the  General  Motors  Building  Cor- 
poration First  7's  due  1922-1946? 

20.  Why  was  American  Agricultural  Chemical  Co.  obliged  to  discontinue 
preferred  dividends  in  1921  after  an  unbroken  record  for  22  years? 

21.  How  may  the  efficiency  of  the  management  of  an  industrial  corpora- 
tion be  judged? 

22.  Refer  to  the  recent  balance  sheet  of  an  industrial  company,  such  as 
General  Electric,  and  analyze  it  according  to  the  following  tests : 

(a)  Are  the  current  assets  at  least  twice  the  current  liabilities? 

(b)  Does  the  item  of  accounts  receivable  exceed  25  per  cent  of  the 
annual  sales? 

(c)  Does  the  inventory  account  exceed  by  a  large  margin  the  ac- 
counts receivable? 

(d)  Does  the  property  valuation  exceed  ten  times  the  net  earnings 
of  the  company? 

(e)  To  what  extent  would  the  surplus  account  be  affected  by  the 
elimination  of  intangible  assets  such  as  goodwill? 

23.  (a)  Why  do  industrial  companies  consolidate? 

(b)  Is  it  advantageous  from  the  standpoint  of  the  security  holders 
that  industrial  companies  consolidate? 

(c)  How  successful  have  been  the  following  consolidations? 

(1)  International  Paper. 

(2)  American  Car  and  Foundry. 

(3)  Republic  Iron  and  Steel. 

(4)  United  States  Steel. 

(5)  International  Mercantile  Marine. 

24.  Comment  upon  the  appended  statement  of  the  capitalization  of  Wil- 
son and  Co.,  as  of  January  1,  1922: 

Common  stock    $20,000,000 

Preferred  stock 10,328,600 

Mortgage  bonds   23,047,000 

Convertible  bonds   26,848,000 

25.  The  balance  sheet  of  American  International  Corporation  as  of  Janu- 
ary 1,  1922,  showed  Investments  listed  at  $29,216,287.    Should  this 
item  have  been  carried  at  cost  or  market  value  as  of  that  date  ? 

26.  Compare  the   conversion   privileges   of   the   American   Agricultural 
Chemical   First   5's  of    1928  and  of   the   Wilson   &   Co.  10-year  6's 
of  1928. 


86  Investment  Problems — Industrial  Securities 

27.  The  American  Chicle  Co.  agreed  to  keep  an  excess  of  current  assets 
over  current  liabilities  of  at  least  150  per  cent  of  the  amount  of  the 
outstanding  6  per  cent  Serial  Notes  of  1927.    On  December  31,  1921, 
the  percentage  of  excess  fell  below  the  requirement.   What  might  the 
noteholders  do? 

28.  Account  for  the  depreciation  policy  of  the  American  Can  Co.  as  illus- 
trated in  the  appended  statement  showing  charges  for  this  purpose 
for  the  years  1906  to  1914: 

1906  $184,327 

1907 561,135 

1908  405,634 

1909  545,526 

1910  633,565 

1911    2,500,000 

1912    983,886 

1913    1,212,762 

1914    750,000 


CHAPTER  XIII 
REAL  ESTATE  MORTGAGES 

1.  Define  (a)  deed;  (b)  mortgage;  (c)  mortgagor;  (d)  mortgagee. 

2.  What  is  understood  by  each  of  the  following  terms  in  a  mortgage  r 

(a)  Granting  clause. 

(b)  Habendum  clause. 

(c)  Defeasance  clause. 

(d)  Consideration. 

3.  (a)   What  is  a  covenant  in  a  mortgage? 

(b)  Why  are  covenants  inserted? 

(c)  What  covenants  usually  appear? 

(d)  What  penalty  is  usually  imposed  in  the  event  that  a  covenant  is 
not  observed? 

4.  (a)   What  is  meant  by  registration  of  a  mortgage? 
(b)  What  is  the  purpose  of  registration  ? 

5.  What  disadvantages  are  involved  in  granting  mortgage  loans  upon : 

(a)  Vacant  land  ? 

(b)  Special  utilizations,  such  as  churches,  factories,  theatres,  clubs, 
etc.? 

(c)  Land  unsuitably  improved? 

6.  A  piece  of  real  estate  is  valued  at  $100,000  against  which  appear  a 
first  mortgage  of  $55,000  and  a  second  mortgage  of  $20,000. 

(a)  What  is  the  margin  of  safety  for  each  mortgage  ? 

(b)  What  is  a  conservative  margin  of  safety  for  a  first  mortgage? 
For  a  second  mortgage? 

(c)  Why  are  the  terms  of  a  second  mortgage  usually  more  favorable 
to  the  lender  than  the  terms  of  a  first  mortgage? 

7.  What  are  some  of  the  difficulties  involved  in  the  accurate  appraisal 
of  real  estate? 

8.  How  are  real  estate  values  affected  by  the  trend  of  business  pros- 
perity ? 

9.  To  what  extent  are  real  estate  values  affected  by  the  shifting  of  com- 
mercial and  residential  sections  of  a  city? 

10.  What  expenses  are  involved  in  foreclosure  proceedings? 

11.  How  may  adequate  safeguards  be  provided  against  the  inherent  risks 
in  mortgage  loans? 

12.  Under  what  conditions  are  savings  banks  and  insurance  companies  in 
New  York  State  permitted  to  invest  funds  in  real  estate  mortgages  ? 

13.  (a)   What  are  the  advantages  and  disadvantages  of  investing  in  farm 

mortgages  ? 

(b)   To  what  extent  has  the  farm  mortgage  investment  market  been 
affected  by  the  operation  of  the  Federal  Farm  Loan  Banks? 


CHAPTER  XIV 
FOREIGN  INVESTMENTS 

1.  (a)   What  is  understood  by  the  expression  that  "trade  follows  the 

flag"? 

(b)  What  conditions  induced  England  to  invest  in  the  United  States 
after  1830? 

(c)  What  does  a  nation  gain  from  foreign  investments? 

2.  With  reference  to  the  foreign  trade  of  the  United  States : 

(a)  Prepare  a  table  showing  the  value  of  exports,  imports,  and  trade 
balance  of  the  United  States  for  each  of  the  past  three  years, 
according  to  Grand  Divisions. 

(b)  What  proportion  of  the  total  exports  for  each  of  the  past  five 
years  comprised   (1)   foodstuffs;   (2)  raw  materials;   (3)  manu- 
factured goods. 

(c)  What  was  the  relationship  between  the  value  of  manufactured 
goods  exported  and  the  value  produced  in  each  of  the  following 
years:  1904,  1909,  1914,  1919? 

3.  To  what  extent   is   Europe   indebted,   publicly   and   privately,   to   the 
United  States  at  the  present  time? 

4.  (a)  How   are    trade   balances    between    nations    adjusted    in   normal 

times  ? 

(b)  W7hat  percentage  of  the  total  gold  monetary  stock  of  the  world 
is  held  by  the  United  States? 

(c)  What  function  does  the  purchase  of  foreign  securities  serve  in 
the  adjustment  of  trade  balances? 

5.  Explain    the    manner    in    which    the    Baldwin    Locomotive    Works 
financed  the  sale  of  railroad  locomotives  to  Belgium  in  1921. 

6.  (a)   What  were  the  principal  issues  of  foreign  securities  sold  in  the 

United  States  prior  to  1914? 

(b)  Distinguish  between  internal  and  external  loans. 

(c)  Why  is  the  City  of  Copenhagen  4  per  cent  Loan  of  1949  known' 
as  a  multiple  currency  loan?  • 

(d)  What  is  the  advantage  of  a  multiple  currency  bond? 

7.  (a)   What  is  known  as  "the  doctrine  of  Lord  Palmerston"  in  the  field 

of  foreign  investment? 

(b)   Differentiate    between   the   American   and    English   government 
policy  toward  the  protection  of  private  capital  invested  abroad. 

8.  What  are  the  eight  important  factors  to  be  considered  in  the  analysis 
of  a  foreign  security? 

9.  (a)   Why  did  the  American  banking  group  in  the  Chinese  consortium 

in  1921  maintain  that  China  should  pay  interest  upon  the  Hukuang 
bonds  of  German  issue? 

(b)   What  provision  in  the  Argentina  Internal  5's  of  1945  takes  into 
consideration  a  similar  contingency? 

90 


92  Investment  Problems — Foreign  Investments 

10.  (a)   What  was  the  purpose  of  the  Edge  amendment  to  the  Federal 

Reserve  Act  in  1920? 

(b)  Did  the  Edge  Act  serve  its  purpose? 

(c)  Why  are  the  domestic  banks  unable  satisfactorily  to  finance  for- 
eign trade? 

(d)  What  is  an  investment  trust  as  the  term  is  used  in  England? 

11.  The  Central  Pacific  European  4's  of  1946,  principal  and  interest  pay- 
able either  in  pounds  sterling  or  francs  at  the  option  of  the  holder, 
par  value  500  francs  or  £19  15s.,  were  quoted  in  the  United  States  in 
March  of  1922  at  $65  each.    What  was  the  yield  to  an  American  in- 
vestor (a)  maturity  not  considered;  and  (b)  maturity  considered? 

12.  What  is  the   Ter  Meulen  plan  for  financing  foreign  trade?     What 
would  have  been  the  result,  had  Germany  had  outstanding  Ter  Meulen 
bonds  when  the  war  began  in  1914? 

13.  (a)   Did   the   United   States   publicly   or  privately  have  any  external 

bond  issues  prior  to  1914? 

(b)  Will  the  holder  of  a  Republic  of  France  8  per  cent  bond  (par 
$1000),  due  in  1945,  profit  from  an  appreciation  in  the  value  of 
the  franc? 

(c)  Will  the  holder  of  a  Republic  of  France  6  per  cent  bond   (par 
1000-f.),  due  in  1931,  profit  from  an  appreciation  in  the  franc? 

(d)  Will  the  holder  of  a  Kingdom  of  Belgium  6  per  cent  note  (par 
$1000),  due  in  1925,  profit  from  an  appreciation  in  the  Belgium 
franc  ? 

14.  What  is  the  security  behind  the  State  of  San  Paulo  External  8's,  due 
in  1936? 

15.  What  are  the  total  external  and  internal  obligations  of  the  following 
governments  :  England ;  France ;  Belgium ;  Germany ;  Italy ;  United 
States  ? 

16.  What  is  the  effect  of  premium  redemption  features  upon  the  market 
for  foreign  securities  in  this  country — as  is  illustrated  in  the  case  of 
the  Belgium  7>^'s  due  in  1945? 

17.  (a)   If  the  current  monthly  trade  balances  are  used  as  a  basis,  what 

will  be  the  trade  balance  of  the  United  States  for  this  calendar 
year? 

(b)  What  is  the  annual  interest  charge  on  the  European  debt  to  the 
United  States? 

(c)  Is  the  American  investment  market  able  to  absorb  the  foreign 
securities   necessary   to   finance   the   trade   balance   and    interest 
payment  ? 

(d)  Even  if  so,  will  it  be  advisable  to  do  so? 

18.  What  is  the  present  discount  on  the  currencies  of  the  leading  Euro- 
pean nations  in  terms  of  American  money  at  the  present  time? 

19.  Upon  what  basis  was  the  paper  currency  of  the   following  nations 
demonetized  or  readjusted? 

(a)  United  States  continental  currency  in  1791. 

(b)  French  assignats  in  1797. 

(c)  Argentina  paper  pesos  in  1899. 


94  Investment  Problems — Foreign  Investments 

(d)  United  States  greenbacks  in  1879. 

(e)  English  paper  pound  in  1821. 

20.  What  two  variables  must  be  considered  in  comparing  domestic  and 
foreign  security  quotations? 

21.  Brazilian  4's  of  1889  are  quoted  "45  London".     What  would  be  the 
equivalent  New  York  price  with  sterling  at  $3.50?     At  $4.00?     At 
$4.50?    At  par? 

22.  Danish  3's  of   1945  are  quoted  "85^   Paris".     What  would  be  the 
equivalent  New  York  price  with  the  French  franc  at  8c  ?    At  9c  ?    At 
lOc?    At  par? 

23.  What  provision   appears   in   the   City   of   Eberfeld  (Germany)  5  per 
cent  Municipals  of  1932  regarding  a  possible  change  in  the  German 
monetary  system  prior  to  maturity? 

24.  Why  is  it  particularly   advisable   in    foreign   investing  that  the   pur- 
chaser be  assured  that  the  purpose  for  which  the  loan  is  being  made 
is  productive,  and  that  the  proceeds  of  the  loan  be  used  exclusively 
for  that  purpose? 

25.  In  1919  the  State  of  Santa  Catharina,  Brazil,  sold  to  a  New  York 
investment  house  $5,000,000  in  6  per  cent  external  bonds.    After  the 
bonds  had  been  sold,  but  before  the  proceeds  were  delivered  in  full  to 
the  State,  the  investment  house  failed.    The  State  thereupon  defaulted 
in  the  interest  payment  under  the  claim  that  the  proceeds  were  never 
received.     What  was  the  position  of  the  holders  of  the  bonds? 


CHAPTER  XV 
FIDUCIARY  INVESTMENTS 

1.  (a)   Name  the  three  principal  classes  of  fiduciary  investors. 

(b)  To  what  extent  are  fiduciaries  permitted  to  exercise  their  own 
judgment  in  making  investments? 

(c)  What  are  "legal  investments"  for  fiduciaries  ? 

2.  (a)   In  the  absence  of  documentary  instructions,  how  may  a  trustee 

in  New  York  State  invest  trust  funds? 

(b)  What  is  the  general  American  principle  for  trustee  investments? 

(c)  Distinguish  between  "corpus"  and  "income" ;  between  "life  ten- 
ant" and  "remainderman." 

3.  (a)   Do  amortization  and  accumulation  on  bonds  affect  corpus  and 

income  ? 

(b)  A  died  in  1910  leaving  $100,000  stock  in  corporation  M  in  a 
trust  fund.  B  was  to  receive  the  income  during  his  lifetime,  after 
which  the  principal  was  to  go  to  C.  The  corporation  paid  regular 
dividends  at  the  rate  of  5  per  cent  per  annum  for  several  years 
thereafter,  but  in  1916  paid  a  40  per  cent  cash  dividend.  How 
should  the  1916  dividend  be  divided  between  B  and  C?  The 
balance  sheets  of  the  corporation  before  the  payment  of  divi- 
dends in  1910  and  1916  were  as  follows: 

BALANCE  SHEET,  1910 

Assets    $4,500,000  Liabilities   $3,000,000 

Capital     1,000,000 

Surplus    500,000 


$4,500,000  $4,500,000 

BALANCE  SHEET,  1916 

Assets    $5,750,000  Capital   $1,000,000 

Liabilities   4,000,000 

Surplus  750,000 


$5,750,000  $5,750,000 

(c)  If  the  1916  dividend  had  been  a  stock  dividend  instead  of   a 
cash  dividend,  would  the  answer  be  changed  ? 

(d)  If  no  dividend  had  been  paid  in  1916,  and  B  died  January  1, 
1917,  to  whom  would  the  property  go? 

4.    (a)   What  are  the  legal  restrictions  upon  savings  banks'  investments 
in  this  State  ? 

(b)  Compare  same  with  New  York  State  restrictions. 

(c)  What  forms  of  investment  securities  are  not  eligible  for  invest- 
ment by  New  York  State  savings  banks  ? 

(d)  To  what  extent  were  the  New  York  State  restrictions  modified 
as  a  result  of  the  Government  operation  of  the  railroads? 

96 


98  Investment  Problems — Fiduciary  Investments 

(e)  Why  does  the  New  York  law  in  some  cases  permit  the  savings 
banks  to  invest  in  the  bonds  of  certain  cities  and  not  in  the  bonds 
of  the  county  in  which  the  cities  are  located? 

5.  (a)  What  is  the  fundamental  difference  between  commercial  and  in- 

vestment banking? 

(b)  On  January  1,   1921,  the  National  Bank  of  Commerce  in  New 
York  had  invested  in  short-term  loans  $363,000,000  and  in  long- 
term  bonds  $11,000,000.    On   January    1,    1922,   the   respective 
amounts  were  $267,000,000  and  $41,000,000.    Account   for  the 
change. 

(c)  In  what  stocks  are  national  banks  permitted  to  invest? 

(d)  Arrange  with  regard  to  investment  desirability  on  the  part  of 
a  commercial  bank :  security,  income,  marketability. 

(e)  What  are  bank  acceptances  and  to  what  class  of  investors  do 
they  appeal? 

(f)  Why  are  commercial  banks  permitted  to  take  greater  risks  in 
investment  commitments  than  savings  banks? 

6.  With  reference  to  the  latest  report  of  the  Superintendent  of  Insur- 
ance of  New  York: 

(a)  Determine  the  relative  amounts  invested  in  the  four  classes  as 
shown  on  page  226. 

(b)  From  what  two  sources  and  in  what  relative  proportions  are  the 
revenues  of  insurance  companies  derived? 

(c)  How  does  the  total   revenue  compare   with   the  total   disburse- 
ments ? 

(d)  What  effect  have  the  conditions  referred  to  in  the  two  previous 
questions  upon  the  investment  policy  of  an  insurance  company? 

7.  What  are  the  legal  restrictions  upon  the  investments  of  life  insurance 
companies  in  this  State? 

8.  What  are  the  requirements  for  the  deposit  of  securities  to  protect  the 
business  done  by  insurance  companies  in  this  State? 

9.  What  are  the  relative  percentages  of  the  funds  of  life  insurance  com- 
panies invested  in  each  of  the  following  classes? 

(a)  -Loans  to  policyholders. 

(b)  Public  bonds. 

(c)  Railroad  bonds. 

(d)  Real  estate  mortgages. 

10.  Referring  to  Section  239  of  the  Banking  Law  of  New  York,  deter- 
mine if  the  following  securities  are  eligible  for  investment  by  sav- 
ings banks  in  that  State : 

(a)  Under  sub-division  1 : 

Panama  2's  of   1936. 
First  Liberty  3^'s  of  1947. 

(b)  Under  sub-division  2 : 

New  York  State  Highway  4's  of  1958. 
New  York  State  Palisade  Park  4's  of  1967. 


100  Investment  Problems — Fiduciary  Investments 

(c)  Under  sub-division  3 : 

State  of  Virginia  Century  3's  of  1991. 

State  of  Massachusetts  Statehouse  4's  of  1933. 

(d)  Under  sub-division  4: 

City  of  Watervliet  (N.  Y.)  City  Hall  4^'s  of  1935. 
City  of  Troy  (N.  Y.)  Park  4's  of  1927. 

(e)  Under  sub-division  5a: 

City  of  Boston  (Mass.)  Water  4's  of  1940. 
City  of  Hoboken  (N.  J.)  Sewer  6's  of  1926. 
County  of  Hudson  (N.  J.)  Bridge  4's  of  1939. 

(f)  Under  sub-division  5b: 

Atlanta,  Ga.,  bonds. 
Baltimore,  Md.,  bonds. 
Chicago,  111.,  bonds. 
Denver,  Col.,  bonds. 
Detroit,  Mich.,  bonds. 
El  Paso,  Tex.,  bonds. 
Memphis,  Tenn.,  bonds. 
Oakland,  Cal.,  bonds. 
Portland,  Ore.,  bonds. 
Seattle,  Wash.,  bonds. 
Spokane,  Wash.,  bonds. 
Toledo,  O.,  bonds. 

(g)  Under  sub-division  7 : 

Chicago,  Milwaukee  and  St.  Paul  Debenture  4's  of  1934. 
Manhattan  Railway  Consolidated  4's  of  1990. 
New  York  and  Erie  First  Extended  4's  of  1947. 

11.  A  trustee  holds  stock  as  an  investment  authorized  by  the  trust  in- 
strument. May  he  subscribe  to  additional  shares  upon  an  increase 
of  capital  if  the  stock  is  not  a  legal  investment  for  trust  funds? 


CHAPTER  XVI 
THE  SMALL  INVESTOR 

1.  (a)  What  are  "baby  bonds"  ? 

(b}   What  advantages  and  disadvantages  are  involved  to  the  investor 
and  to  the  investment  house  in  the  marketing  of  baby  bonds  ? 

2.  (a)   An  investor  desires  to  purchase  a  single  share  of  United  States 

Steel  common  stock.  Is  such  a  purchase  possible? 

(b)  What  proportion  of  the  total  trading  on  the  New  York  Stock 
Exchange  represents  odd-lot  transactions? 

(c)  What  disadvantage  arises  in  odd-lot  trading? 

3.  (a)   Explain  the  partial  payment  plan  as  applied  to  the  purchase  of 

investment  securities. 

(b)  Differentiate  between  partial  payment  buying  and  margin  trans- 
actions. 

(c)  Why  are  many  houses  unwilling  to  handle  partial  payment  ac- 
counts ? 

(d)  In  what  two  ways  do  houses  offset  the  higher  cost  of  carrying- 
partial  payment  accounts  ? 

(e)  A   purchases    10   shares    of    American    Woolen    common    stock 
through  the  investment  house  of  B.  &  C.,  on  the  partial  payment 
plan.    After  A  has  paid   three-fourths   of   the   purchase   price, 
B.  &  C.  fail.   What  is  A's  position  as  a  creditor  of  the  house  of 
B.  &C? 

(f)  Assume  in  (e)  that  B.  &  C.  had  pledged  the  stock  as  collateral 
for  a  bank  loan. 

4.  (a)   Explain  the  issuance  and  redemption  of  Treasury  savings  cer- 

tificates. 

(b)  A  purchased  a  $1,000  certificate  on  October  13,  1920.   What  was 
the  cost?  When  will  the  face  value  be  $1,000?  What  would  have 
been  the  redemption  value  on  March  3,  1922? 

(c)  What  was. the  volume  of  Treasury  saving  certificates  and  war 
savings  stamps  issued  and  redeemed  each  year  since  1918? 

(d)  What  is  the  present  volume  outstanding? 

5.  With  reference  to  postal  savings  banks: 

(a)  What  interest  rate  is  paid  on  deposits? 

(b)  WThat  limitation  is  placed  upon  deposits? 

(c)  Under  what  conditions  are  postal  savings  bank  bonds  issued? 

(d)  What  is  the  volume  of  (1)  postal  savings  deposits  and  (2)  postal 
savings  bank  bonds  outstanding? 

6.  (a)   Distinguish  between  mutual  and  stock  savings  banks. 

(b)  Under  what  conditions  should  an  individual   with  limited  sav- 
ings place  his  funds  in  savings  banks  ? 

(c)  Why  is  the  maximum  savings  bank  deposit  account  limited  ? 


104  ,.    .    ti    .   ^.^Iwvestmsnl  Problems — The  Small  Investor 

(d)  What  effect  have  State  restrictions  upon  the  investment  of  sav- 
ings bank  deposits  with  regard  to  (1)  safety  and  (2)  income? 

7.  (a)  What  is  the  general  plan  under  which  building  and  loan  asso- 

ciations operate  ? 
(b)  What  advantages  and  disadvantages  are  involved? 

8.  (a)   May  life  insurance  be  properly  termed  an  investment  by  a  policy- 

holder? 

(b)  What    six    features    should    every   good    life    insurance    policy 
contain  ? 

(c)  WThat  is  meant  by  a  "mutual"  life  insurance  company  ? 


CHAPTER  XVII 
WORK  OF  THE  BOND  HOUSES 

1.  fa)   What  are  the  three  classes  of  bond  houses  ? 

(b)  Name  at  least  two  prominent  investment  houses  in  each  class. 

(c)  Why  do  investment  houses  specialize  in  certain  issues? 

2.  (a)   W'hat  are  the  five  major  functions  of  a  bond  house? 

(b)   Does  each  of  these  functions  necessarily  require  a  separate  de- 
partment ? 

3.  (a)   In  what  way  can  a  house  be  of  service  in  an  advisory  capacity 

to  the  corporation  whose  securities  it  markets  ? 
(b)   To  the  investor  who  buys  through  the  house  ? 

4.  (a)  WThat   advantages   and   disadvantages   arise    from   the   banking 

function  of  an  investment  house? 

(b)   Is  the  present  tendency  for  the  houses  to  expand  their  banking 
facilities? 

5.  (a)   Outline  the  various  methods  employed  by  an  investment  house 

in  marketing  securities. 

(b)  What  is  the  value  of  a  mailing  list  ? 

(c)  From  what  published  sources  may  information  be  derived  as  to 
prospective  purchasers  of  securities  ? 

(d)  Where  is  the  best  market  for  the  sale  of  each  of  the  following? 

(1)  U.  S.  Panama  3's  of  1938. 

(2)  U.  S.  Liberty  3^'s  of  1947. 

(3)  U.  S.  Liberty  4%'s  of  1938. 

(4)  U.  S.  Treasury  notes. 

(5)  Federal  Farm  Loan  bonds. 

(6)  State  of  Iowa  bonds. 

(7)  City  of  Topeka  (Kan.)  bonds. 

(8)  Pennsylvania  Railroad  bonds. 

(9)  Pennsylvania  Railroad  Equipment  notes. 

(10)  Pennsylvania  Railroad  stock. 

(11)  Montana  Power  bonds. 

(12)  Laclede  Gas  stock. 

(13)  U.  S.  Steel  bonds. 

(14)  Anaconda  Copper  stock. 

(15)  Chase  National  Bank  (N.  Y.)  stock. 

6.  Prepare  an  advertisement  for  a  daily  newspaper  to  be  2  columns  wide 
and  4  inches  deep,  offering  4  per  cent  municipal  bonds  of  the  city  in 
which  you  reside. 

7.  Prepare  a  single  page  circular  offering  preferred  stock  in  any  indus- 
trial  company   concerning   which   you   have   access   to   adequate    in- 
formation: 

8.  (a)   In  what  manner  does  a  house  create  an  "artificial  market"  for 

its  securities  and  how  does  this  operate  to  benefit  the  investor? 
(b)   In  what  other  ways  does  a  house  protect  the  investor? 

106 


108  Investment  Problems — Work  of  Bond  Houses 

9.    (a)  What  is  security  underwriting? 

(b)  May  a  security  issue  be  underwritten  without  the  aid  of  a  syn- 
dicate ? 

(c)  What  are  the  duties  of  the  syndicate  manager? 

(d)  In  what  ways  do  the  syndicate  members  profit  ? 

(e)  What  are  the  advantages  of  underwriting  to  the  corporation  and 
to  the  investor? 

(f)  How  many  members  comprised  the  Anglo-French  Loan  syndi- 
cate in  1915? 

(g)  Why  are  insurance  companies  usually  prohibited  from  joining 
syndicates  ? 

(h)  What  was  the   syndicate  price   and   the   offering  price   of   the 

Anglo-French  syndicate  in  1915? 
(i)  What  was  the  gross  selling  profit  in  the  sale  of  the  Interborough 

Rapid  Transit  First  and  Refunding  5's  in  1913  ? 
(j)   Account  for  the  failure  of  the  American  Can  syndicate  in  1913; 

the   United    States   Rubber    syndicate   in    1916;   the    American 

Woolen  syndicate  in  1920. 

10.  What  is  the  customary  plan  of  allotment  when  the  subscriptions  to  a 
new  bond  issue  exceed  the  amount  offered? 

11.  On  March  3,  1921,  Beaver  Board  8's  closed  at  99.    During  the  fol- 
lowing day  bids  were  as  low  as  25,  although  the  internal  affairs  of  the 
company  remained  unchanged.    Account  for  the  decline. 

12.  Why  do  bond  houses  prefer  to  sell  on  a  "when  issued"  basis  rather 
than  on  a  "firm"  basis  when  offering  new  issues? 

13.  (a)  Of  the  two  classes  of  private  enterprise  which  seek  the  assistance 

of  an  investment  house,  which  offers  the  better  opportunity? 
(b)  What  five  factors  must  a  house  consider  in  determining  the  status 
of  a  going  concern? 

14.  Why  are  investment  houses  unwilling  to  submit  "firm"  bids  subject  to 
acceptance  on  corporate  offerings? 

15.  (a)   Why  must  a  security  offering  be  a  complete  success  or  a  failure? 
(b)   Why  does  the  price  frequently  decline  immediately  following  a 

security  offering? 

16.  Why  do  not  investment  houses  compete  to  a  greater  extent  in  seeking 
corporate  security  offerings? 

17.  (a)   What  is  the  "block"  method  of  selling  securities? 

(b)  What  is  the  disadvantage  to  the  purchaser? 

(c)  What  is  a  stock  bonus? 

18.  In  what  respect  does  the  market  for  securities  in  January  and  July 
differ  from  that  during  the  other  months? 

19.  What  are  the  four  preliminary  steps  taken  by  a  bond  house  in  con- 
nection with  the  purchase  of  securities? 

20.  In  selling  refunding  bonds,  what  attempt  is  made  to  get  holders  of 
the  first  lien  to  convert? 


1 10  Investment  Problems — Work  of  Bond  Houses 

21.  Outline    the    activities    of    the    Investment    Bankers'    Association    of 
America. 

22.  Appended  is  an  analysis  of  the  new  security  issues  in  the  United 
States  for  the  years  1919,  1920,  and  1921. 

(a)  Account  for  the  increase  in  1921  over  1920. 

(b)  Why  did  foreign  government  securities  react  in  1921  after  the 
decline  in  1920? 

(c)  Why  did  the  nature  of  the  corporate  securities  change  so  pro- 
foundly during  the  three  years? 

TABLE  A — According  to  purpose  of  issue 

(In  millions  of  dollars) 

Year  New  capital  Refunding  Total 

1921  $3,574  $656  $4,231 

1920  3,634  375  4,010 

1919  3,552  808  4,361 

TABLE  B — According  to  class  of  borrowers 
(In  millions  of  dollars) 

Year 
1921 
1920 
1919 

TABLE  C — According  to  nature  of  corporate  offerings 
(In  millions  of  dollars) 

Bonds  Bonds 

Year  Long  term  Short  term  Stock 

1921  $1,915  $226  $278 

1920  1,234  660  1,071 
1919                          633                       540  1,565 


Corporate 

$2,419 
2,966 
2,739 

Foreign 
government 
$385 
291 
514 

Municipal 
$1,203 
683 
691 

CHAPTER  XVIII 
LISTING  ON  THE  EXCHANGES 

1.  (a)   What  is  a  stock  exchange? 

(b)  Do  members  trade  for  their  own  account? 

(c)  Do  members  profit  in  the  same  manner  as  investment  bankers? 

2.  (a)  What  are  the  chief  requirements  for  listing  on  the  New  York 

Stock  Exchange? 

(b)  Do  these  same  requirements  hold  good  for  all  other  stock  ex- 
changes ? 

(c)  Why  was  Stutz  Motor  stock  "stricken  from  the  list"  in  1920? 

(d)  Why  are  the  securities  of  New  Jersey  Zinc  Co.  not  listed  ? 

3.  (a)   What  are  the  advantages  to  the  investor  of  holding  a  listed  se- 

curity ? 

(b)  How  many  securities  are  listed  on  the  New  York  Stock  Ex- 
change ? 

(c)  How  many  are  traded  in  on  the  most  active  days? 

(d)  Is  it  equally  desirable  that  stocks  and  bonds  be  listed? 

(e)  What  was  the  widest  spread  between  bid  and  asked  prices  on  in- 
active securities  for  any  recent  day? 

4.  Compile  a  list  of  the  ten  most  active  stocks  on  the  New  York  Stock 
Exchange  for  each  of  the  past  five  years. 

5.  Contrast  the  listing  requirements  of  the  New  York  Stock  Exchange 
with  the  purchasing  requirements  of  a  reputable  investment  house. 

6.  What  is  short  selling  and  to  what  extent  does  the  practice  affect  the 
investment  market? 

7.  To  what  extent  are  investment  bonds  traded  in  on  the  New  York 
Stock  Exchange? 

8.  (a)   Is  the  purpose  of  the  exchanges  to  create  a  market? 
(b)   Why  is  a  list  of  stockholders  required  by  the  exchange? 

9.  (a)   What  was  the  manner  of  quoting  bonds  on  the  New  York  Stock 

Exchange  before  Jan.  1,  1909?    After  that  date? 
(b)   What  was  the  manner  of  quoting  stock  on  the  New  York  Stock 
Exchange  before  Oct.  13,  1915?    After  that  date? 

10.  (a)   What  is  the  significance  of  a  rapid  and  unexplained  change  in 

the  market  price  of  certain  securities? 

(b)  Why  should   the  statements  of   officials  at   such  times  be  dis- 
counted ? 

11.  Why  is  the  investor  who  buys  only  listed  bonds   following  an  un- 
•    satisfactory  policy? 


112 


CHAPTER  XIX 
MECHANICS  OF  PURCHASE  AND  SALE 

1.  How  may  ownership  of  each  of  the  following  forms  of  securities  be 
transferred? 

(a)  Coupon  bond. 

(b)  Registered  bond. 

(c)  Stock  certificate. 

(d)  Stock  subscription  right. 

(e)  Stock  purchase  warrant. 

(f)  Dividend  scrip. 

2.  What  are  the  functions  of  the  registrar  and  transfer  agent  in  the 
transfer  of  corporate  securities? 

3.  Explain  each  of  the  following  purchase  and  sale  instructions: 

(a)  At  the  market. 

(b)  At  97. 

(c)  On  the  happening  of  an  event. 

(d)  At  89  until  dividend  time. 

(e)  Day  order. 

(f)  G.  T.  C. 

(g)  Specified  time. 

(h)   Discretionary  order, 
(i)   Stop  loss  order. 

4.  (a)   On  May  12,  an  Atchison,  Topeka  and  Santa  Fe  General  4  per 

cent  bond  due  in  1995,  interest  A.  and  O.,  is  quoted  at  89 %. 
What  is  the  total  cost,  inclusive  and  exclusive  of  commission 
charge  ? 

(b)  On  May  12,  Atchison,  Topeka  and  Santa  Fe  common  stock,  divi- 
dend payable  March  1  quarterly  at  the  rate  of  6  per  cent  per  an- 
num, is  quoted  at  84.  What  is  the  total  cost,  inclusive  and  ex- 
clusive of  commission  charge? 

5.  What  is  the  current  commission  charge  on  the  purchase  of  the  follow- 
ing securities  on  the  New  York  Stock  Exchange? 

(a)  $1000  bond  N.  Y.  Central  Deb.  6  per  cent  at  99. 

(b)  $1000  bond  U.  S.  Liberty  4*/4  per  cent  at  98. 

(c)  100  shares  I.  R.  T.  Pref.  Stock  at  7y2. 

(d)  100  shares  N.  Y.  Central  Common  at  87. 

(e)  100  shares  Gen.  Electric  Common  at  152. 

(f)  10  shares  I.  R.  T.  Pref.  stock  at  7y2. 

6.  Why  are  most  bonds  sold  net,  i.  e.,  without  commission  charge? 

7.  (a)   R  purchases  100  shares  of  Pennsylvania  common  in  1920.     He 

endorses  the  certificate  under  duress.     B  secures  it  and  sells  it  to 
C,  who  is  not  aware  of  the  past  history.     Has  C  good  title? 
What  right  has  A? 
(b)   What  are  the  three  implied  warrants  in  every  transfer  for  value? 

114 


1 16  Investment  Problems — Purchase  and  Sale 

8.  M  was  the  owner  of  a  coupon  bond  which  was  lost.    Later  the  bond 
is  discovered  in  the  possession  of  N,  who  is  an  innocent  purchaser 
for  value.     May  M  recover  from  N? 

9.  (a)   What  are  the  five  requisite  elements  or  negotiability? 

(b)  Is  a  certificate  of  stock  a  negotiable  instrument? 

(c)  A  stock  certificate  for  John  H.  Smith  is  erroneously  made  out 
to  John  M.   Smith.     Does  it  become  deliverable  if   Mr.   Smith 
endorses  first  as  on  the  face  of  the  certificate  and  directly  beneath 
his  proper  signature? 

10.    What  is  the  full  meaning  of  the  following  order  to  a  broker: 

"Buy  for  my  account  and  risk  200  D.  &  H.  at  112." 
11. .  What  are  the  three  obligations  of  a  broker? 

12.  The  holder  of  a  coupon  bond  writes  his  name  across  the  bond,  sig- 
nifying that  he  is  the  owner  thereof.     Will  this  bond  later  constitute 
"good  delivery"  on  the  New  York  Stock  Exchange? 

13.  (a)   What  four  requirements  must  be  observed  in  stock  transfers  in 

New  York  State? 

(b)   What  additional  requirements  are  in  force  if  stock  is  in  name 
of  decedent?    Of  trustee?    Of  corporation? 

14.  Is  a  corporation  liable  for  the  transfer  of  stock  if  the  endorsement  is 
forged  ? 


CHAPTER  XX 
MATHEMATICS  OF  INVESTMENT 

1.  Explain  the  following  terms: 

(a)  Nominal  yield. 
( b  )   Effective  yield. 
( c  )   Net  yield. 

(  d )   Amortization. 

(  e  )  Accumulation. 

(  f  )   Compound  interest. 

(g)   Compound  discount. 

(h)   Present  worth. 

(  i  )   Premium. 

(  j  )   Discount. 

(k)   Interpolation. 

( 1  )   Accrued  interest. 

(m)   Accrued  dividend. 

(n)   Conversion  parity. 

2.  Compute  the  yield    on  the  following  stocks  : 

Dividend  Market  price- 
Companies                          Par                    rate  3-20-1922 

American  Tel.  &  Tel $100                    9%  122*4 

Northern    Pacific    100                    7%  7&A 

Pennsylvania   50                   4%  37^ 

Public  Service  of  N.  J 100                   4%  86M 

Allied  Chem.  &  Dye no  $4  63% 

3.  What  is  the  effect  of  extra  dividends  and  stock  dividends  upon  stock 
yields  ? 

4.  During  the  early  part  of   1922  General  Electric  was  paying  regular 
dividends  at  the  rate  of  8  per  cent  in  cash  and  4  per  cent  in  stock 
annually.     On  March  20,  1922,  the  stock  was  quoted  at  156.     \Yhat 
was  the  yield? 

5.  (a)   Explain  the  difference  in  computing  the  yield  on  bonds  and  the 

yield  on  stocks. 

(b)  Does  this  difference  obtain  in  the  case  of  the  Perpetual  6's  of 
the  Public  Service  Corporation  of  N.  J.?     In  the  case  of  Com- 
mercial Cable  4's  due  in  2397? 

6.  (a)   The  Goodyear  Tire  and  Rubber  First  8's  of  1941  are  redeemable 

at  a  premium  of  20  per  cent.     Does  this  affect  the  yield? 

(b)  The  bonds  are  also  subject  to  redemption  by  lot  drawing  previous 
to  maturity.     Does  this  affect  the  yield? 

(c)  The  Baltimore  and  Ohio  Convertible  4j^'s  of  1933  were  quoted 
at  80^  on  April  1,  1922.    These  bonds  are  redeemable  at  102JX 
at  the  option  of  the  company  after  March  1,  1923.     What  was 
the  yield  on  April  1,  1922? 

118 


120  Investment  Problems — Mathematics 

(d)  The  Diamond  Match  Debenture  7^'s  of  1935  were  quoted  at 
107^  on  April  1,  1922.  These  bonds  are  redeemable  at  105  at 
the  option  of  the  company  after  Nov.  1,  1923.  What  was  the 
yield  on  April  1,  1923? 

7.  With  reference  to  the  specimen  page   from  the  Rollins  bond  table 
book  which  appears  on  page  280: 

(a)  Compute  the  yield  as  of  March  20,  1922,  on  the  Bethlehem  Steel 
Refunding  5's  of  1942,  current  price  92. 

(b)  Compute  the  market  price  as  of  March  20,  1922,  of  the  Pacific 
Gas  and  Electric  5's  of  1942,  current  yield  at  6  per  cent. 

8.  Use  the  specimen  page  from  the  Sprague  bond  table  book  which  ap- 
pears on  page  282  and  compute  as  of  March  20,  1922,  the  yield  on  a 
Federal  Farm  Loan  5  per  cent  bond,  due  in  1942,  current  price  102^. 

9.  Use  the  formulae  which  appear  on  pages  285  and  286  and  determine : 

(a)  The  value  of  $1000  at  compound  interest  for  ten  years  at  6  per 
cent,  interest  compounded  semi-annually. 

(b)  The  present  worth  of  $1000  payable  in  10  years,  compound-dis- 
counted semi-annually  at  6  per  cent. 

10.  A   prominent   investment   house   recently   headed   an   advertisement : 
"Which  has  the  greater  value,  the  principal  or  the  coupon?"     Deter- 
mine mathematically  how  much  the  purchaser  of  a  Kansas  City  Ter- 
minal 4  per  cent   bond  due   in    1960  pays    for   the   right   to   receive 
respectively  the  coupon  payments  during  the  life  of  the  bond  and  the 
principal  at  maturity  upon  the  assumption  that  the  price  was  80*/2  on 
March  20,  1922. 

11.  Assume  that  the  holder  of  a  Louisville  and  Nashville  Sl/2  per  cent 
Series  A  coupon  bond  due  in  2003  detaches  the  interest  coupons  for 
the  ensuing  15  years   (face  value  $825)   and  leaves  intact  the  bond 
itself  (face  value  $1000),  and  the  coupons  for  the  remaining  66  years 
fface  value  $3,630).     Which  would  have  the  greater  present  value, 
the  interest  for  the  first  15  years,  or  the  principal  plus  the  interest 
for  the  remaining  66  years? 

12.  (a)   What  determines  whether  stock  will  sell  at  a  premium  or  a  dis- 

count ? 

(b)  What  determines  whether  a  bond  will  sell  at  a  premium  or  a  dis- 
count ? 

13.  Explain  why  the  holders  of   International  Mercantile  Marine   Pre- 
ferred did  not  receive  adequate  compensation  for  the  loss  of  dividends 
between  1904  and  1916  when  payments  on  account  of  the  accumulated 
arrearage  were  made  after  the  latter  date. 

14.  An  investor  purchases  $10,000  in  Utah  Power  and  Light  First  5's 
due  in  1944  on  May  1.   As  the  interest  payment  dates  are  F-A  (Feb- 
ruary 1  and  August  1),  how  is  the  accrued  interest  on  the  bond  ad- 
justed?  Is  there  any  loss  to  the  investor? 

15.  With  reference  to  the  New  York  Central  Convertible  Debenture  6's 
described  on  page  301 : 


122  Investment  Problems — Mathematics 

(a)  What  is  the  conversion  parity  of  the  bonds  based  on  the  current 
price  of  the  stock  ? 

(b)  What  is  the  conversion  parity  of  the  stock  based  on  the  current 
price  of  the  bonds  ? 

16.  What  will  be  the  difference  in  price  between  a  5  per  cent  20-year 
bond  selling  to  yield  5.25  per  cent  and  the  same  bond  selling  to  yield 
5.50  per  cent? 

17.  The  Northern  Pacific  General  Lien  3's  are  due  in  2047.   What  is  the 
justification  in  considering  accumulation  in  determining  the  yield  in 
view  of  the  distant  maturity  date? 

18.  American  Telephone  and  Telegraph  7-year  6's  of  1925  are  convertible 
into  stock  at  par  and  $6  in  cash  for  each  share  received. 

(a)  What  effect  has  this  conversion  privilege  upon  the  market  price 
of  the  bonds? 

(b)  How  is  the  matter  of  accrued  interest  on  the  bonds  and  accrued 
dividends  on  the  stock  adjusted  ? 

19.  The  Bethlehem  Steel  7  per  cent  notes,  Series  E,  due  July  15,  1923. 
were  convertible  on  April  1,  1922,  into  Consolidated  6's,  Series  A.  due 
1948  "at  par  at  a  price  equivalent  to  a  6y2  per  cent  income  basis." 
How  was  the  conversion  handled? 

20.  Complete  the  following  table : 

(i) 

Convertible 
bond 

( Baltimore  & 
]  Ohio  Conv. 
[4^'sof  1933 

{Chesapeake  & 
Ohio  Conv. 
S's  of  1946 
f  Chicago, 
J   Milwaukee  & 
I   St.  Paul  Conv. 
[.  S's  of  2014 

(New  Haven 
Conv.  6's 
of  1948 
f  Norfolk  & 
J  Western 
1  Conv.  6's 
of  1926 


(2) 
Current 
price 

(3) 
Convertible 
into 

(4) 
Conversion 
ratio 

(5) 
Current 
price  of 
conversion 
option 
security 

(6) 

Prospec- 
tive 
oppor- 
tunity 

CHAPTER  XXI 
GENERAL  INVESTMENT  PRINCIPLES 

1.  (a)   What  is  meant  by  diversification  of  risk? 
(b)   Why  is  diversification  advisable  in  investing? 

2.  (a)   Under  what  two  general  heads  may  investments  be  diversified? 
(b)   What  are  the  subdivisions  under  each  head? 

3.  What  is  the  maximum  percentage  of  the  total  of  a  fund  which  may 
conservatively  be  invested  in : 

(a)  A  single  enterprise. 

(b)  A  single  class  of  enterprise. 

(c)  A  single  geographical  section. 

4.  Divide  all  investments   into   five  classes  according  to  maturity  and 
indicate  a  maximum  percentage  for  each  class. 

5.  Apply  your  answer  to  the  preceding  question  to  the  year  1900  and 
comment  upon  the  reinvestment  opportunities  that  would  have  arisen 
at  the  maturity  dates  up  to  the  present  time. 

6.  Give  illustrations  to  evidence  the  advisability  of  distributing  funds  as 
suggested  in  Problem  No.  3  preceding. 

7.  What  are  Law's  seven  general  principles  of  distribution? 

8.  Complete  on  a  percentage  basis  the  distribution  of  an  investment  fund 
in  the  appended  table: 

Class  of  Range  of  Percentage  of  total  fund 

security  yield  Class  A          Class  B  Class  C 

Gilt  edge  . .  up  to  ....  %  

High  grade %  to %  

Good   %to....%  

Fair    %  to  ....  %  

Speculative.  over  ....  %  

Class  A  comprises  investors  entirely  dependent  upon  investment  income. 
Class  B  comprises  those  partially  dependent. 
Class  C  comprises  those  entirely  independent. 

9.  Diversify  an  investment  fund  of  $25,000  with  regard  to  the  class  ol 
enterprise,  maturities,  and  geographical  division  as  is  illustrated  on 
page  310. 

10.  Analyze  the  answer  to  problem  No.  9  in  comparison  with  the  yield 
distribution  suggested  in  problem  No.  8. 

11.  Analyze  the  investment  holdings  of  any  of  the  large  insurance  com- 
panies operating  in  New  York   State  in  the  manner  illustrated  on 
page  313  in  the  analysis  of  the  bonds  held  by  the  Rockefeller  Foun- 
dation.    (List  of  holdings  may  be  secured  from  the  annual  report  of 
the  Superintendent  of  Insurance.)     Give  particular  attention  to : 

(a)  Amount  in  any  one  enterprise. 

(b)  Amount  in  any  one  class. 

(c)  Amounts  according  to  maturity  dates. 

124 


126  Investment  Problems — General  Principles 

(d)  Average  holdings  per  enterprise. 

(e)  Average  yield  on  entire  list. 

12.  The  man  who  is  reported  to  be  the  wealthiest  in  the  United  States  is 
accredited  with  having  once  said  :  "I  might  have  converted  my  interests 
into  gold  at  one  time  and  have  taken  my  money  to  England."     Could 
he  have  done  so? 

13.  An  investor  holds  the  following  securities.    He  desires  to  raise  imme- 
diately $10,000.    Which  should  he  sell?    Under  what  conditions  would 
it  be  wiser  to  arrange  a  collateral  loan  ? 

100  Delaware  and  Hudson  Common. 

25  United  States  Steel  Preferred. 

50  Pacific  Gas  and  Electric  Common. 

30  American  International  Common. 
$2000  Frisco  Prior  Lien  6's  of  1928. 
$1000  Northern  Pacific  Prior  4's  of  1997. 
$3000  Goodyear  Tire  and  Rubber  8's  of  1941. 
$5000  Kingdom  of  Italy  6>^'s  of  1925. 


CHAPTER  XXII 
RELATION  OF  ECONOMIC  CONDITIONS 

1.  (a)   What  is  the  business  cycle? 

(b)  What  are  the  four  principal  phases  of  the  business  cycle? 

(c)  Distinguish  between  a  panic,  a  crisis,  and  a  depression. 

(d)  In   what   years   occurred  the  panics   in  United   States   financial 
history  ? 

(e)  Why  are  business  conditions  said  always  to  be  in  the  process  of 
cumulative  change? 

2.  What  are  the  characteristics  of  the  four  stages  of  the  business  cycle? 

3.  (a)   What  are  the  "barometers  of  business"? 
(b)  Arrange  in  the  order  of  barometric  utility : 

(1)  Pig-iron  production. 

(2)  Price  index  numbers. 

(3)  Wheat  crop. 

(4)  Interest  rates. 

(5)  Bank  clearings. 

(6)  Cotton  crop. 

(7)  Bank  statements. 

4.  Why  is  agricultural  production  regarded  as  the  "fountain-head"  of 
business  activity  in  the  United  States? 

5.  What  is  the  relationship  between  the  financial  condition  of  the  com- 
mercial banks  of  the  country  and  the  trend  of  business  conditions? 

6.  What  is  the  significance  of  changes  in  each  of  the  following  economic 
factors,  with  particular  regard  to  the  investment  market? 

(a)  Railroad  net  earnings. 

(b)  Commodity  exchange  quotations. 

(c)  Pig-iron  production. 

(d)  Bituminous  coal  production. 

(e)  Stock  exchange  quotations. 

(f)  Business  failures. 

(g)  General  commodity  prices, 
(h)   Interest  rates. 

( i)   Exports  and  imports. 

( j )   International  gold  shipments. 

(k)   Building  operations. 

(1)   Federal  finance. 

(m)   Foreign  exchange  rates. 

(n)   Bank  clearings. 

(o)   Car  loadings. 

(p)   Idle  cars. 

(q)   Wage  rates. 

(r)   Corporate  earnings. 

(s)   New  security  issues. 

128 


130  Investment  Problems — Relation  of  Economic  Conditions 

7.  (a)   What  is  the  trend  of  security  prices  during  the  phases  of  the  busi- 

ness cycle? 

(b)  At  what  stages  of  the  business  cycle  is  it  advisable  to  buy  bonds? 
To  sell  bonds  ?    To  buy  stocks  ?    To  sell  stocks  ? 

8.  List  the  various  barometers  stated  in  problems  Nos.  4,  5,  and  6  imme- 
diately preceding,  and  opposite  each  indicate  ''favorable/'  "unfavor- 
able/' or  "neutral"  with  regard  to  the  prospect  for  improved  business 
conditions  during  the  next  twelve  months. 


CHAPTER  XXIII 
RELATION  TO  TAXATION 

PART  I.    FEDERAL  TAXES. 

(a)  Distinguish  between  the  normal  tax  and  the  surtax. 

(b)  What  are  the  present  rates  for  the  normal  tax  and  the  surtaxes  ? 

(c)  What  percentage  of  total  taxable  income  must  be  paid  by  an  indi- 
vidual with  a  taxable  income  of  $3,000;  $8,000;  $20,000;  $150,- 
000;  $1,000,000? 

A  has  a  taxable  income  of  $25,000  which  includes  the  interest  on  five 
Colorado  Industrial  First  5's,  due  in  1934,  which  yield  6.20  per  cent 
before  taxes.  What  is  the  yield  after  the  payment  of  taxes? 

Prepare  a  table  as  indicated  below  to  show  what  yield  before  Federal 
taxes,  must  be  received  from  taxable  securities  by  investors  with  large 
incomes  to  equal  in  net  income  the  return  from  tax-free  securities. 

Taxable 

income  3^%           4%       4*/4%       4y2%       4*/4%           5% 

$3,000  

$10,000  

$25,000  

$50,000  

$100,000          

$300,000          

$1,000,000        

(a)  What  securities  are  tax-free? 

(b)  What  securities  are  partially  tax-free? 

(c)  Upon  what  securities  is  part  of  the  tax  paid  by  the  corporation? 

(d)  What  securities  are  exempt  from  the  normal  tax? 

(a)  What  is  meant  by  a  "tax-free  covenant"  bond? 

(b)  To  what  extent  does  the  covenant  hold  good? 

(c)  What  is  meant  by  "withholding"? 

Determine  the  tax  position  of  each  of  the  following  securities : 

(a)  Delaware  and  Hudson  common  stock. 

(b)  Morris  and  Essex  guaranteed  stock. 

(c)  Canadian  Pacific  debenture  stock. 

(d)  Royal  Dutch  shares. 

(e)  U.  S.  Liberty  First  3^'s  of  1947. 

(f )  U.  S.  Liberty  First  4^'s  of  1938. 

(g)  U.  S.  Liberty  First-Second  Converted  4*4's  of  1947. 
(h)   New  York  City  Corporate  stock  4's  of  1959. 

(i)  City  of  Columbus  (O.)  4's  of  1947. 

( j)  State  of  Utah  4^'s  of  1931. 

(k)  County  of  Buncombe  (N.  C.)  5's  of  1956. 

(1)  Miami  Conservancy  District  5>^'s  of  1946. 

132 


134  Investment  Problems — Relation  to  Taxation 

(m)   Central  Pacific  European  4's  of  1946. 
(n)   Bush  Terminal  5's  of  1955. 
(o)  American  Straw  Board  7's  of  1929. 
(p)  American  Gas  6's  of  2016. 
(q)   Manhattan  Elevated  Consolidated  4's  of  1990. 
(r)   New  York  Central  Refunding  and  Improvement  Series  A  4^'s 

of  2013. 

(s)   French  Government  External  8's  of  1945. 
(t)   French  Government  Internal  5's  of  1980. 

7.  To  what  extent  are  dividends  paid  other  than  in  cash  taxable? 

PART  II.     STATE  TAXES. 

8.  Outline  the  taxes  imposed  by  this  State  upon  the  various  classes  of 
investment  securities. 

9.  What  are  the  tax  rates  imposed  under  the  New  York  State  Income 
Tax  law? 

10.  A  resident  of  New  York  with  a  taxable  income  of  $45,000  holds  a 
taxable  6%  bond  purchased  at  par.  What  is  his  net  yield  after  Federal 
and  State  taxes  ? 

11.  Show  how  certain  States  tax  intangible  property  and  indicate  the  in- 
justice of  this  practice. 

PART  III.     TAXATION  IN  GENERAL. 

12.  A  stockholder  in  a  New  York  corporation,  by  reason  of  his  stock- 
holding, is  directly  and  indirectly  subject  to  what  forms  of  taxation 
by  the  various  governmental  bodies? 

13.  (a)   What  is  an  inheritance  tax?  An  estate  tax? 

(b)  What  are  the  current  Federal  and  State  rates  of  these  taxes? 

(c)  How  does  the  operation  of  an  inheritance  tax  affect  the  invest- 
ment field  ? 

14.  From    the    most    recent    Annual    Report    of    the    Secretary    of    the 
Treasury,  analyze  the  current  revenues  and  expenditures  and  state 
what  is  the  prospect  for  tax  reduction  during  the  next  ten  years  ? 

15.  To  what  extent  are  American  holders  of  foreign  securities  subject  to 
double  taxation  thereon. 

16.  (a)   Referring  to  the  schedule  of  amortization  on  page  296,  would  the 

holder  of  the  bond  include  as  income  in  his  tax  return  for  the 
year  1922,  the  total  interest  of  $60.00  received  in  cash,  or  the 
amortized  net  interest  of  $48.64? 

(b)  Referring  to  the  schedule  of  accumulation  on  page  297,  would 
the  holder  of  the  bond  include  as  income  in  his  tax  return  for  the 
year  1922  the  total  interest  of  $40.00  received  in  cash,  or  the  total 
income  of  $47.45  which  represents  actual  interest  plus  accumu- 
lation ? 


136  Investment  Problems — Relation  to  Taxation 

17.  (a)  A  municipal  bond  is  purchased  in  1919  directly  from  the  issuing 
municipality  at  96.  At  maturity  will  the  appreciation  of  4  points 
be  regarded  as  taxable  income? 

(b)  If  the  bond  in  (a)  were  a  corporate  bond,  would  the  answer  be 
changed  ? 

(c)  If  the  bond  in  (a)  were  originally  purchased  by  X  and  was  sold 
by  X  to  Y  before  maturity  at  94,  would  the  loss  be  deductible  for 
tax  purposes?  If  at  98,  would  the  gain  be  taxable  income? 

(d)  If  Y  in  (c)  sold  the  bond  to  Z  at  97,  or  held  to  maturity,  would 
the  gain  or  loss  be  taxable  income  ? 


CHAPTER  XXIV 
SAFEGUARDING  OF  INVESTMENTS 

1.  Distinguish  between  internal  and  external  safeguards. 

2.  What  are  the  earmarks  of  a  fraudulent  prospectus? 

3.  How  do  public  utility  commissions  in  the  various  States  protect  the 
interests  of  investors? 

4.  (a)   What  are  "blue  sky"  laws? 

(b)  In  what  States  are  such  laws  now  in  effect? 

(c)  \Vhat  are  the  usual  provisions  of  the  laws? 

(d)  What  objections  may  reasonably  be  raised  to  these  laws? 

5.  (a)   What  is  a  "bucket  shop"? 

(b)  What  are  the  three  ways  in  which  the  house  may  operate  ? 

(c)  Account  for  the  numerous  failures  of  such  houses  early  in  1922. 

6.  Why  did   the   following  clause   appear   in  the   circular   offering  the 
Louisville  Gas  and  Electric  7  per  cent  notes  in  1918: 

Passed  by  the  Capital  Issues  Committee  of  the  Federal  Reserve  Board 
(opinion  No.  50)  as  not  incompatible  with  the  interest  of  the  United  States, 
but  without  approval  of  the  merits,  security,  or  legality  thereof  in  any 
respect. 

7.  Why  did  the  Department  of  State  early  in  1922  request  that  in- 
vestment houses  submit  foreign  security  offerings  for  approval  before 
marketing  the  bonds  ? 

8.  What  precautions  should  an  investor  take  to  protect  the  safekeeping 
of  his  securities? 


CHAPTER  XXV 
PROTECTION  OF  INVESTMENTS 

1.  How  may  an  investor  watch  the  current  status  of  his  holdings? 

2.  On  July  21,  1919,  a  holder  of  Bethlehem  Steel  Class  B  common  stock 
was  advised  to  transfer  his  holdings  into  the  8  per  cent  Preferred. 
Was  the  advice  well  founded? 

3.  What  is  the  significance  of  changes  in  the  following  items   in  the 
financial  statements  of  a  corporation : 

(a)  Gross  revenues. 

(b)  Operating  ratio. 

(c)  Maintenance  charges. 

(d)  Working  capital. 

(e)  Inventories. 

(f )  Fixed  charges. 

(g)  Managing  personnel. 

4.  Show  how  the  financial  difficulty  in  which  the  Westinghouse  Com- 
pany found  itself  in  1907  might  have  been  foreseen  from  the  financial 
reports  of  the  company  for  the  preceding  six  years. 

5.  (a)   What  are  protective  committees? 

(b)  What  are  the  legal  powers  of  such  committees? 

(c)  Why  does   not   one   committee   act    for   all   classes   of   security 
holders  ? 

(d)  Why  do  the  stockholders'  committees  usually  comprise  the  direct- 
ors of  the  company ;  the  bondholders'  committees,  the  investment 
banking  interests ;  and  the  creditors'  committees,  the  commercial 
banking  interests  ? 

(e)  Why  is  a  general  reorganization  committee  sometimes  appointed 
by  the  separate  committees? 

(f)  Must  default  occur  before  a  protective  committee  may  be  ap- 
pointed ? 

(g)  Must  security  holders  join  in  the  action? 

(h)  Under  what  circumstances  is  it  advisable  for  a  security  holder 

to  deposit  his  securities  ? 
(i)   How  does  a  reorganization  committee  come  into  possession  of 

the  corporate  property? 
(j)   What  is  known  as  an  "upset"  price? 
(k)  Why,  in  reorganization,  is  the  name  of  a  railroad  changed  simply 

to  railway,  or  from  company  to  corporation  ?   Is  this  as  true  with 

industrial  companies  as  with  railroad  companies  ? 
(1)   How  is  a  security  holder  treated  who  refuses  to  assent  to  the 

reorganization  plan? 

6.  What  is  the  order  of  priority  of  claims  against  the  assets  of  a  cor- 

poration in  receivership? 

140 


142  Investment  Problems — Safeguarding 

7.  What  are  the  usual  objects  of  a  reorganization  and  how  may  the 

accomplishment  of  these  objectives  affect  the  security  holder? 

8.  Under  what  conditions  may  a  security  holder  reasonably  object  to  any 
one,  or  a  combination,  of  the  following  methods  of  readjusting  the 
finances  of  a  company  unable  to  meet  its  obligations : 

(a)  Paying  an  assessment. 

(b)  Permit  placing  of  prior  lien. 

(c)  Exchange  for  weaker  securities. 

9.  What  two  questions  should  a  security  holder  consider  before  deciding 

whether  or  not  to  stay  through  a  reorganization? 

10.  (a)   What  is  the  conservative  assessment  limit  for  a  stockholder  to 

pay  in  a  railroad  receivership  ? 

(b)   What  alternative  has  the  stockholder  who  does  not  desire  to  pay 
the  assessment? 

11.  (a)   In  what  ways  may  an  investment  house  syndicate  profit  through 

underwriting  reorganization  securities  ? 

(b)   How  does  this  arrangement  operate  to  help  the  success  of  the  re- 
organization ? 

12.  (a)   What  caused  the  Goodyear  Tire  and  Rubber  reorganization  in 

1921? 

(b)  What  was  the  plan  of  reorganization? 

(c)  Was  the  reorganization  successful? 

13.  From  the  appended  reorganization  plan  of  the  Missouri,  Kansas  and 

Texas : 

(a)  Why  were  certain  securities,  notably  the  equipment  trusts,  per- 
mitted to  remain  undisturbed  ? 

(b)  Arrange  the  various  bond  issues  in  the  sequence  of  their  claims 
as  indicated  in  the  proposed  plan. 

(c)  Upon  what  securities  were  assessments  levied  and  what  securi- 
ties were  issued  for  cash  payments  ? 


144 


Investment  Problems — Safeguarding 


EXISTING  SECURITIES 


Cash 
Each  $1,000  Principal  Amount  of  Existing  Securities  to 

Receive 


Description 
M.,  K.  &T.  Ry.  Co 
1st  Mtg    4s    June  1    1990  $ 

f^    D 

Amount       .U$ 

:                        •£  o 

,39,999,500         $500 
20,000,000 
9,992,000           500 
10,421,000           250 
18,974,000          350 
3,253,000 

1,924,000 
2,500,000           500 
5,468,000        1,000 

4,000,000          750 
58,000 

4,505,000          750 
1,340,000       1,000 

2,098,000        1,200 
838,000          500 
3,000,000          250 

743,000          500 
883,000 

13,000,000 
63,283,257 
of  $20  a  share. 
;curities  stated  a 

$  Si  1    i  !L 

.rl  &i    .i|     s|    ||g 

v.  o        ^  o            *o  .r                 i-  Jj           o  %r  j3 

PH  PQ        PH  PQ              <JW                 P-t  C/3           (Js_>C/3 

$500        
$1,192.50          $64.16 
250        ...           503.33         
250        ...             73.13          719.37 
525.00         525.00 
500.00         666.67           IV3 

250,00         750.00           2y2 
500        

36.67 
33.33 

2nd  Mtg.  4s,  June  1,  1990  
1st  &  Ref.  4s,  Sept.  1,  2004  
Gen.  Mtg.  4^s,  Jan.  1,  1936  
2-Yr.  Sec.  Gold  Notes,  May  1,  1916 
1st  Mtg.  Ext.  5s,  Nov.  1,  1944.... 
St.  Louis  Div.  1st  Mtg.  Ref.  4s, 
Apr    1    2001   

Kansas  City  &  Pac.  R.  R.: 
1st  Mtg    4s    Aug  ,   1990  

M.,  K.  &Okla.  R.  R.  Co.: 
1st  Mtg    5s    May  1,  1942  

M.,  K.  &  Eastern  Ry.: 
1st  Mtg.  5s    Apr    1,  1942  

537.50           

2nd  Mtg    5s    Apr    1    1942 

500.00         656.25           1& 
541.67         

M.,  K.  &  T.  of  Tex.: 
1st  Mtg.  5s,  Sept.  1,  1942  
Dallas  &  Waco  Ry.: 
1st  Mtg.  5s,  Nov.  1,  1940  
Wich.,  F.  &  Northwestern: 
1st  Mtg.   5s,  Jan.  1,   1939  
1st  Lien  Col.  Tr.  5s,  Jan.  1,  1925. 
1st  &  Ref.  Mtg.  5s,  1940  
Southwestern  Coal  &  Im.  Co.: 
1st  Mtg.  6s,  July  1,  1929  

33.33 

675  00 

812.50         187.50 
890.00         
1,000        

140            60.00         10 
175            75.00         10 
tOn  payment  of  $25  a  share, 
re  the  amounts  outstanding  in  hands  of 

26.67 

Boonv.  R.  R.  Bridge  Co.: 
1st  Mtg    4s    Nov    1    1951          ..     . 

M.,  K.  '&  T.  Ry.  Co.: 

*Pref    Stk    (per   10  shs  ) 

tCom    Stk    (per  10  shs  ) 

*On  payment 
Note:  The  amounts  of  existing  s« 

public. 

CHAPTER  XXVI 
READING  THE  FINANCIAL  PAGE 

1.  What  is  meant  by  the  following  expressions: 

"Carrying  the  bag" 
"Watered  stock" 
"Window  dressing" 
"Tape  reading" 
"Irish  dividend" 
"Squeezing  the  shorts" 
"Close  to  the  rails" 
"A  bear  raid" 
"A  bull  movement" 
"Cutting  a  melon" 
"The  granger  roads" 
"The  Gould  roads" 
"Passing  the  dividend" 
"Pegging  the  price" 
"Arbitraging" 
"Averaging" 
"Cats  and  dogs" 
"Covering  the  shorts" 
"Pyramiding" 
"Wfash  sales" 
"Matched  orders" 
"Cornering  the  market" 

2.  What  information  may  be  gained  from  the  following  record  of  the 
transactions  in  U.  S.  Steel  Common  on  March  20,  1922: 

/ — —1922 N  Div.  Net         , Closing , 

High        Low  Sales  rate        First      High         Low          Last       change        Bid          Asked 

96y2       82        24,000        $5        95       95  M      94  ft      95*/2      -Y4        95  ^       95  */2 

3.  What  is  the  significance  of  the  following  abbreviations  in  connection 
with  stock  quotations:    Ex.-div.;  w.  i. 

4.  A  certain  inactive  security  is  quoted  360  bid,  700  asked.    How  would 
you  interpret  this  quotation? 

5.'    (a)   What  purpose  is  served  by  compiling    stock    and   bond   averag< 

prices  ? 

(b)   From  a  practical  standpoint  what  difficulties  hinder  the  compila- 
tion of  satisfactory  averages? 

6.    (a)  What  is  the  unit  of  bond  trading  on  the  New  York  Stock  Ex- 
change ? 
(b)   How  are  quotations  made? 

146 


148  Investment  Problems — The  Financial  Page 

7 .  What  information  may  be  derived  from  the  following  transcript  of 

transactions  in  the  security  named,  on  Mar.  20,  1922 : 

Erie   1st  Con.  4's 

48    59 

5 
20    59 

8 
6 
3  6(> 

8.  Explain  the   following  abbreviations  which   appeared  in  connection 
with  the  bond  quotations  in  the  New  York  Times  on  March  20,  1922 : 

int  ctfs— temp  6s — col  4s — col  tr  5s — conv  6s 

gen  4s — adj  4s — cv  4s — ref  4^s — deb  6s — gtd  5s 

con  5s — S  F  5s — 4s  Ser  A — pr  In  5s — inc  4s — equip  7s 

9.  A  sale  of  Penn  6l/2's  is  reported  "s6f."  What  is  the  significance  of  the 
abbreviation  ? 

10.  Differentiate  between  transactions  on  the  New  York  Stock  Exchange, 
on  the  Consolidated  Exchange,  and  on  the  Curb  Market  in  New  York. 

11.  Why  are  equipment  notes  quoted  differently  from  other  bonds? 

12.  Interpret  the  following  commodity  quotations  as  of  March  20,  1922 : 

Iron 21.00 

Wheat 1.463/4 

.   Corn     7634 

Coffee    0934 

Copper    12.87^ 

Cotton 18.40 

13.  What  is  the  significance  of  the  call  money  rate  at  New  York? 

14.  (a)  What  is  meant  by  par  of  foreign  exchange? 

(b)  What  was  the  low  point  for  the  pound  sterling  since  1914? 

(c)  Interpret  the  following  quotations  as  of  March  20,  1922 : 

London     4.37^4 

Paris    8.97 

Rome 5.07^ 

Amsterdam    37.85 

Berlin    38 

Madrid    15.54 

15.  The  daily  statement  of  the  condition  of  the  United  States  Treasury 
Department  as  of  March  17,  1922,  showed  an  excess  of  ordinary  re- 
ceipts over  ordinary  disbursements  amounting  to  $545,000,000  for  the 
fiscal  year  1922  to  date.   What  was  the  significance  of  this  condition? 


CHAPTER  XXVII 
THE  TOOLS  OF  INVESTMENT 

1.  Explain  the  nature  of  the  investment  information  supplied  by  each  of 
the  following  services : 

(a)  Standard  Statistics  cards. 

(b)  Moody  analyses. 

(c)  Poor  and  Moody  manuals. 

(d)  White  and-Kemble  railroad  mortgage  maps. 

(e)  Kember  publications. 

2.  Outline  the  information  afforded  by  the  Commercial  and   Financial 

Chronicle. 

3.  What  is  the  most  convenient  source  of  information  on  copper  securi- 

ties? 

4.  Information  is  sought  as  to  the  present  value  of  a  stock  certificate 
issued  in  1902.    No  place  of  business  appears  on  the  certificate,  nor 
is  the  company  known  locally.   Where  might  definite  information  be 
obtained  ? 

5.  What  is  the  most  reliable  source  of  information  concerning  the  finan- 

cial-condition of  any  company? 

6.  Enumerate  the  various  ways  in   which  the  current  quotation  on  a 
security  may  be  obtained. 

7.  W'hat  information  is  available  in  the  annual  record  of  insurance  com- 
pany purchases  ? 


150 


Return  to  desk  from  which  borrowed. 
bookisDUEonAelandatesta.npedbelow. 


• 

REC'D  LD 

I960 


21-957n^ll,'50(2877S16)476 


YC  23640 


